September 29, 2008

Top 50 - Weekend wrap

"Sept. 26 (Bloomberg) -- Gold rose above $900 an ounce, heading for the second straight weekly gain, as talks on the $700 billion U.S. plan to ease the credit crunch stalled. Silver also gained."

"Investment in the SPDR Gold Trust, the biggest exchange- traded fund backed by bullion, has jumped 18 percent in two weeks. The surge followed the collapse of Lehman Brothers Holdings Inc. and the U.S. takeover of American International Group Inc., Fannie Mae and Freddie Mac."

"``Demand for gold will soar as people continue to seek out safe havens,'' said James Turk, the founder of Goldmoney.com, which held $368 million in silver and gold in storage for investors at the end of August. ``Gold is the safest haven of all in a period of financial stress and monetary uncertainty.''"

"Gold futures for December delivery rose $19.50, or 2.2 percent, to $901.50 an ounce at 10:34 a.m. on the Comex division of the New York Mercantile Exchange. The price is up 4.3 percent this week. Last week, the metal surged 13 percent, the most since October 1999."

"Silver futures for December delivery climbed 19.5 cents, or 1.5 percent, to $13.47 an ounce."

Washington Mutual Bank became the latest casualty of the credit crunch last night as the Federal Deposit Insurance Corp. seized the assets and sold some to JPMorgan Chase & Co.

"The Dow Jones Industrial Average dropped as much as 1.4 percent, and equities in Europe and Asia fell. The dollar dropped against a weighted basket of six major currencies."

"Since the second quarter of 2007, banks worldwide have posted $522.1 billion in writedowns and losses related to investments in subprime mortgages."

"``There is no agreement in Congress,'' said Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago. ``You've got a lot of systemic risk, and what you're seeing today is a renewed flight to quality. Gold is the ultimate quality asset.''"

"Sept. 26 (Bloomberg) -- Confidence among U.S. consumers fell in September from a preliminary reading, a sign the worsening credit crisis will prompt Americans to curtail their spending."

"The Reuters/University of Michigan final index of consumer sentiment declined to 70.3, lower than forecast, after a reading of 73.1 in early September. The measure was still higher than the August reading of 63, reflecting lower gasoline prices. The gauge of sentiment averaged 85.6 in 2007."

"Since the preliminary report was issued on Sept. 12, Lehman Brothers Holdings Inc. filed for bankruptcy, the federal government took over American International Group Inc. and stocks plummeted. The biggest financial meltdown since the Great Depression is likely to hurt consumer spending and the economy for the rest of the year."

"``All the financial instability is hurting confidence,'' Karen Cordes, an economist at Scotia Capital Inc. in Toronto, said before the report. ``It'll keep many Americans wondering if they should save more now rather than spend. Consumer spending will likely fall quite a bit.''"

"The confidence index was forecast to fall to 70.8, according to the median of 62 economists surveyed by Bloomberg News. Estimates ranged from 63.9 to 73.3."

Slower Growth

"A government report earlier today showed consumer spending was less than initially estimated in the second quarter, dragging economic growth to a slower pace than previously reported. The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, down from a preliminary estimate of 3.3 percent issued last month, the Commerce Department said today in Washington."

"The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, declined to 67.2 from a preliminary reading of 70.9 in early September. The measure is up from 57.9 in August."

"A gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, dropped to 75 from a preliminary reading of 76.5. The reading was 71 in August."

"Consumers said they expect an inflation rate of 4.3 percent over the next 12 months, compared with 4.8 percent in the August survey."

Financial Crisis

"The financial crisis escalated in the second half of September, bringing down Lehman Brothers and AIG and roiling stock markets. The S&P 500 index on Sept. 23 capped its biggest two-day slump in six years."

"Earlier this month, the government also seized control of mortgage financiers Fannie Mae and Freddie Mac in an attempt to keep the housing slump from worsening."

"The final Reuters/University of Michigan consumer confidence report reflects about 500 responses, compared with 300 households for the preliminary survey."

"Regular unleaded gasoline prices have eased to an average of $3.72 a gallon at the pump so far this month, compared with $3.76 in August and more than $4 in July, according to AAA."

"At the same time, eight consecutive months of job losses in the economy and declines in home prices are making shoppers wary."

"Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, reported a 19 percent drop in second-quarter profit, and predicted a decline in earnings this quarter."

"Sales ``continued to be negatively affected by the economic slowdown in general and by issues specific to the housing industry in particular,'' Chief Executive Officer Steven Temares said on a conference call on Sept. 24."

Sept. 26 (Bloomberg) -- China's yuan slid by the most since a peg against the dollar was scrapped in July 2005 on speculation policy makers are limiting appreciation to aid exporters and sustain growth amid global financial turmoil.

"Premier Wen Jiabao pledged on Sept. 24 to maintain economic, financial-market and capital-market stability as the U.S., the world's largest economy, may enter a recession. China halted yuan gains this quarter as a central bank survey published Sept. 22 showed export orders dropped to the lowest since the peg."

"``Worries about the economy have escalated,'' said Yang Bin, a Beijing-based dealer at Bank of China Ltd., the country's biggest foreign currency trader. ``A return to the fast pace of appreciation in the first half would stifle struggling export industries at this difficult time.''"

"The Chinese currency fell 0.46 percent to 6.8485 per dollar as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The yuan, Asia's best-performing currency this year, has advanced 0.08 percent this quarter, the smallest gain since a fixed exchange rate ended more than three years ago."

"China will adjust policy in a ``timely'' manner as the economic situation changes, Wen said at a forum in New York, according to a report yesterday by the state-run Xinhua News Agency."

"Chinese industrial companies' profit grew 19 percent from a year earlier to 1.87 trillion yuan ($274 billion) in the first eight months of the year, the statistics bureau said today. That compares with 37 percent growth in the same period of 2007."

"``Importers' demand for the dollar is quite strong today because the markets will be shut next week for the holiday,'' said Li Tao, a foreign exchange trader at Shenzhen Development Bank Co. in Shenzhen. Financial markets will be closed for the National Day holidays."

"The yield on the 4.5 percent treasury bond due May 2038 was little changed at 4.2 percent, according to the China Interbank Bond Market. The price of the security was 105.05 per 100 yuan face amount."

"Lending continued to rise in August before the rout on Wall Street, expanding 2.3 percent from the previous month to 1.11 trillion reais ($598.9 billion), the central bank said today. Lending may rise 24 percent this year, according to a survey of 26 banks by the Brazilian Banks Federation -- slower than the 27.8 percent growth rate for 2007, which was the biggest increase in 12 years. Economists estimate the rate will fall in 2009 to 19.3 percent, which would be slowest pace since 2003."

"``The picture is much more worrisome than some people are painting,'' said Fernando Meibak, founder of Sao Paulo-based Sunrise Investments, an alternative investments broker. ``A violent constraint of credit will hit Brazilian economic activity in an intense way.'' Meibak, who worked in the banking industry for more than 30 years, is the former chief executive officer of HSBC Investments in Brazil."

"Lending in Brazil expanded more than 20 percent annually since 2004, a year after President Luiz Inacio Lula da Silva took his post pledging to stimulate economic growth, create jobs and fight inflation. The increase was driven by a decline in the benchmark lending rate to 13.75 percent from 25 percent when he took office. Job creation and higher wages also contributed to credit expansion."

"Loans grew 31.8 percent for the 12 months ending in August, representing 38 percent of the country's gross domestic product, compared with 37.2 percent in July and 32.8 percent in the same month last year. The increase in auto loans eased while corporate lending was pushed by companies seeking working capital, the central bank said."

Less Lending in September

"``Lending rose last month pushed by companies which are getting loans for working capital, or investments and other plans,'' said Altamir Lopes, head of the central bank's economic research department, told reporters in Brasilia. ``Loans for individuals are slowing as they may have reached a limit.''"

"The U.S. financial turmoil is reducing loans on offer in September, Lopes said. External funding for corporate loans dropped 2.6 percent in the Sept. 1-Sept. 15 period compared to last month, because of the lower supply of credit abroad, Lopes said."

"The price larger Brazilian companies are paying to raise money has risen to about 2 percent a year above the local interbank rate, up from 0.4 percent six months ago, Meibak said, as a result of the collapse of the U.S. subprime-mortgage market last year, which caused financial institutions around the world to post $523 billion in losses and writedowns on assets."

`Putting on the Brakes'

"In an attempt to compensate for the effects of the U.S. credit crunch, the central bank on Sept. 24 delayed the introduction of higher rates for mandatory deposits from leasing companies by two months and raised the threshold on exemptions for cash, time and savings deposits. The measures will add 13.2 billion reais ($7.16 billion) to the financial system, the central bank said."

"``The central bank is probably receiving signs that the banks are putting on the brakes more than it expected,'' said Andre Caminada, partner at Victoire Finance Capital in Sao Paulo, which manages about $130 million in assets."

Auto Loans

"Auto loans were one of the main drivers pushing bank lending higher. At Banco Itau Holding Financeira SA, Brazil's second-biggest non-government bank by assets, this segment grew 62 percent in the second quarter, while at bigger rival Banco Bradesco SA it expanded 49 percent."

"This type of credit may slow as car sales cool. Domestic vehicle sales -- which expanded 33 percent in July -- grew 4 percent in August, the slowest pace in almost two years. The drop shows that government measures to cool the economy and lower inflation from a 3-year high of 6.4 percent are starting to take hold. Central bankers raised the benchmark lending rate four times since April to 13.75 percent from a record low of 11.25 percent."

"The average annual interest rate Brazilian banks charge customers rose to 40.1 percent from 39.4 percent in July, the central bank said. The default rate on personal loans increased to 7.5 percent from 7.3 percent in the previous month."

Sept. 26 (Bloomberg) -- The yen rose against the dollar and headed for its biggest weekly gain since May as U.S. lawmakers disagreed over a financial rescue and Washington Mutual Inc. became the nation's biggest bank to collapse.

"Japan's currency also strengthened against the euro and the Brazilian real after a group of Republicans opposed to the Treasury's $700 billion asset-purchase plan submitted an alternative proposal, prompting investors to reduce holdings of higher-yielding assets funded in Japan."

"``The risk-aversion trade is back on, but it's not huge,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``You never know what the next headline will be. The talk is that they will eventually pass the package in some shape or form.''"

"The yen rose 0.5 percent to 106.06 per dollar at 3:03 p.m. in New York, from 106.56 yesterday, extending this week's gain to 1.3 percent. The yen increased 0.4 percent to 155.01 per euro, from 155.68, and was up 0.3 percent for the week. The dollar traded at $1.4616 per euro, compared with $1.4609. It has depreciated 1 percent since Sept. 19."

"President George W. Bush said in a statement today that Congress will overcome any disagreement and approve a financial rescue, while Alabama Senator Richard Shelby, the top Republican on the Banking Committee, said he's willing to let U.S. stock markets open Monday without an agreement."

Stronger Yen

"The yen gained 1.8 percent to 57.45 versus the real today and 0.9 percent to 88.19 against the Australian dollar on speculation investors will exit trades in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent target lending rate compares with 4.25 percent in Europe, 7 percent in Australia and 13.75 percent in Brazil."

"``Safe-haven trades are back on,'' said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. ``No one is committed to big positions.''"

"Goldman Sachs Group Inc. recommended today that its clients buy the Brazilian real, Mexico's peso, Turkey's lira and the Aussie against the dollar, saying the bailout may bolster demand for higher yields."

"``We see potential for a significant rally if market conditions start to normalize,'' New York-based Goldman currency strategist Jens Nordvig and colleagues wrote in a research note."

"The real declined 1.9 percent to 1.8554 per dollar today and was headed for a 12 percent drop this month, the biggest among the most-active currencies. The Aussie fell 0.5 percent to 83.08 U.S. cents and was down 3.1 percent in September."

Unclear on Bailout

"Currency traders are reluctant to put on big bets because it's unclear when Congress will pass the bailout, according to Paresh Upadhyaya, who helps manage $50 billion in currency assets as a Boston-based senior vice president at Putnam Investments."

"``These are not the right times to be putting on any bold trades because it's the perfect environment for getting whipsawed,'' said Upadhyaya. ``I think waiting on the sidelines is probably the most prudent thing to do.''"

"After reaching a one-year low of $1.3882 on Sept. 11, the euro has traded in a range of $1.4437 to $1.4866 this week. It reached the all-time high of $1.6038 on July 15."

Futures contracts on the Chicago Board of Trade showed traders were certain the Fed would reduce the 2 percent target rate for overnight lending between banks by Oct. 29. There's a 66 percent chance policy makers will cut by a quarter-percentage point and 34 percent odds of a half-point decrease. Traders priced in a 68 percent likelihood of no change a week ago.

Economic Growth

"The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, slower than the previous estimate, the Commerce Department said today. Reports showed yesterday sales of new homes fell in August to a 17-year low and orders for durable goods dropped more than forecast."

"``The economy is slowing, and an interest-rate reduction will take its toll on the dollar, said RBS's Ruskin. ``We are in an early stage of a downturn, which will last for many, many months.''"

"The yen may rise further as the VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations of stock market price changes, closed above 30 for the past nine days, indicating markets are facing a shock comparable to the 1997 Asian currency crisis and the Sept. 11, 2001, terrorist attacks, according to JPMorgan Chase."

"Japan's currency has increased 2.6 percent versus the dollar in September, the first monthly gain since March. Against the euro, Japan's currency has advanced 3 percent. The dollar is up 0.4 percent versus the euro this month."

"Sept. 26 (Bloomberg) -- Brazilian stocks tumbled, capping the first weekly decline in three, after two of the nation's biggest exporters posted currency losses and ousted their chief financial officers, raising concern more companies may follow."

"Aracruz Celulose SA, the world's biggest eucalyptus-pulp maker, slumped 19 percent, the most in a decade, after saying it's assessing losses from investments tied to the Brazilian currency. Sadia SA, Brazil's second-biggest food exporter, erased a third of its value after losing 760 million reais ($410 million) from currency trades and firing its head of finance. Votorantim Celulose e Papel SA fell the most this decade after UBS AG said demand for the pulp maker is ``unfavorable.''"

"``There are some rumors that there may be more to come,'' said Saulo Sabba, who helps manage the equivalent of $245 million as investment director at Maxima Asset Management in Rio de Janeiro. ``The recent volatility of the dollar and the lack of liquidity in some assets from all the financial problems abroad caused this situation with Sadia and Aracruz.''"

"Sadia fell the most ever, sliding 30 percent to 7 reais. Brazil's second-largest food company said the losses resulted from pulling out of a currency investment early because of turmoil in financial markets. Sadia fired CFO Adriano Lima Ferreira."

"``This came as a total surprise and increases the company's risk in the eyes of investors,'' said Brascan Corretora analyst Denise Messer. The loss from currency-related investments represented 12 percent of Sadia's stock-market value at yesterday's close, according to data compiled by Bloomberg. It's 7.5 percent of Messer's estimate for full-year revenue."

"``This will certainly hurt its 2008 earnings,'' Messer said in a telephone interview from Rio de Janeiro. She had a 2008 profit forecast of 535 million reais and now estimates a loss of at least 224 million."

"Cia. Siderurgica Nacional SA, Brazil's third-biggest steelmaker, dropped 7 percent to 42.90 reais. CSN may have lost $700 million on an ``ADR swap,'' the securities arm of Banco Bradesco SA said in an e-mail to clients. The company has all of its foreign currency debt hedged and its only currency related losses are related to the swap, Bradesco said in an e-mail to clients. Bradesco said the note was based on calls to company officials."

"Votorantim had its steepest loss since December 1999, sinking 12 percent to 30.60 reais. Brazil's third-largest pulp and paper maker was downgraded to ``neutral'' from ``buy'' at UBS by analyst Edmo Chagas."

"Sept. 26 (Bloomberg) -- India's rupee declined for a seventh week, the longest stretch in more than 2 1/2 years, on speculation losses in financial markets will widen as a U.S. rescue package is delayed in Congress."

"The rupee declined 5.6 percent in September, headed for the worst month since the Asian financial crisis in 1997, as global investors sold emerging-market assets. The currency approached the lowest level in two years as funds abroad dumped more than half of the local shares they purchased in 2007. The rupee also fell on speculation refiners bought foreign currency to settle overseas bills."

"``The rupee is weighed down by the global turmoil and the increasing uncertainty,'' said Roy Paul, assistant manager of treasury at Federal Bank Ltd. in the southern Indian city of Kochi. ``Importers' dollar demand is strengthening and that is adding more pressure.''"

"The rupee declined 1.5 percent this week to 46.5475 against the dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. The currency reached 46.9750 last week, the lowest since July 2006."

"Foreign investors were net sellers of Indian stocks for a fifth straight month, dumping $9 billion this year, according to data from the Securities & Exchange Board of India. They bought a record $17.2 billion in stocks last year."

Stock Losses

"The Bombay Stock Exchange Sensitive Index, or Sensex, completed its worst week in six months after talks on a $700 billion U.S. financial plan to ease a credit squeeze in the world's largest economy stalled. The index is set for its first annual decline since 2001."

The rupee is the second-worst performer this year among the 10 most-active Asian currencies excluding the yen. It fell today by the most since Sept. 16 on speculation refiners increased dollar purchases to buy cheaper crude.

The price of crude oil for November delivery fell 2.2 percent to $105.67 a barrel on the New York Mercantile Exchange. The commodity has climbed more than 10 percent this year.

"India's average oil import bill climbed to $8 billion a month this year from $5.5 billion in 2007, Bloomberg data show."

Sept. 26 (Bloomberg) -- Japan's 10-year bonds rose for a second day after negotiations stalled on a $700 billion U.S. plan to buy troubled assets from financial institutions.

"Benchmark securities completed a second week of gains as the Nikkei 225 Stock Average fell after U.S. House Republicans offered a different solution to the financial crisis, fanning concern implementation of a plan will be delayed. A Bank of Japan survey next week may show sentiment among manufacturers declined to a five-year low, according to a Bloomberg survey."

"``There seems to be complications that will increase the perception that the solution will be delayed,'' which weighs on stocks and is bullish for bonds, said Guthrie Williamson, a portfolio manager in Sydney at Principal Global Investors, which manages $245 billion in assets globally. ``Longer-term, I remain bullish on government bonds.''"

"The yield on the 1.5 percent bond due September 2018 fell 1.5 basis points to 1.46 percent as of 4:43 p.m. in Tokyo at Japan Bond Trading Co., the nation's largest interdealer debt broker. The price rose 0.131 yen to 100.348 yen. The yield dropped half a basis point, or 0.005 percentage point, this week."

"The Nikkei 225 fell 0.9 percent, capping a weekly loss. Japan's bonds typically move in the opposite direction to stocks. Benchmark 10-year yields had a correlation of 0.7 with the Nikkei this month, according to data compiled by Bloomberg. A value of 1 would mean the two moved in lockstep."

Proposal Undermined

Senate Banking Committee Chairman Christopher Dodd said the agreement in principle he had reached earlier in the day with some Republicans was later undermined by a proposal offered by House Republicans led by Representative Eric Cantor.

"The difference in yield between Japanese 10-year bonds and similar-dated U.S. Treasuries was 2.32 percentage points today, compared with 2.37 percentage points yesterday, which was the widest this month, according to data compiled by Bloomberg."

"The spread will narrow to 2.28 percentage points by year- end, according to a Bloomberg survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts."

Government bond futures fell after a statistics bureau report showed Japan's inflation rate exceeded 2 percent for a second month. Inflation erodes the value of the fixed payments from debt.

Ten-year bond futures for December delivery lost 0.20 to 137.20 at the 3 p.m. close on the Tokyo Stock Exchange.

"Core prices, which exclude fresh food, climbed 2.4 percent in August from a year earlier, the same pace as July, the statistics bureau said today in Tokyo."

Inflation Bonds

"Still, inflation-linked bonds, an indicator of investor expectations for consumer-price gains, are yielding more than regular debt by the largest margin since the securities were introduced in March 2004. That indicates investors expect inflation will slow."

"The Tankan index of manufacturer sentiment may have fallen to minus 2 points in September, from 5 in June, according to the median estimate of economists surveyed by Bloomberg before the Oct. 1 report. That would be the first time since 2003 that the index is negative, which means pessimists outnumber optimists."

"``The bleak economic outlook should also keep the JGB market environment favorable in coming months,'' Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp. in Tokyo, wrote in a report yesterday. Investors ``have little choice but to invest their idle money in JGBs,'' she said."

Japan's Economic and Fiscal Policy Minister Kaoru Yosano yesterday said the world's second-largest economy won't be able to pull out of its slump until exports recover.

"Exports grew 0.3 percent in August from a year earlier after rising 8 percent the previous month, the Ministry of Finance said yesterday."

"``The best place to put your money is still the bond market,'' said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which manages the equivalent of $54 billion in assets."

"Sept. 26 (Bloomberg) -- Freddie Mac, the mortgage-finance company seized Sept. 7 by the U.S. government, said its portfolio of home loans and mortgage bonds dropped at a 56 percent annualized rate in the month leading up to its takeover."

"The portfolio, which had expanded by $85.8 billion in April through July, fell by $37.4 billion in August to $760.9 billion as Freddie Mac sold off assets, the McLean, Virginia-based company said in its monthly volume summary today."

"The shrinkage helps explain why the government moved to take control of Freddie and Washington-based Fannie Mae as the selling likely contributed to a rise in yields over benchmarks on their mortgage bonds to near 22 year highs, boosting interest rates for homebuyers. Freddie had failed to raise $5.5 billion in capital it agreed to seek in May, and both companies said they faced additional losses from the housing slump."

"``As house prices, earnings and capital have continued to deteriorate, their ability to fulfill their mission has deteriorated,'' Federal Housing Finance Agency Director James Lockhart said in written testimony before the Senate Banking Committee this week."

"Late payments of at least 90 days among single-family loans that Freddie either owns or guarantees within bonds rose to 1.11 percent in August, the company said. The rate is up from the 0.46 percent reported for August 2007 and 1.01 percent in July 2008."

Sept. 26 (Bloomberg) -- Canada's government bonds rose the most in almost two weeks as the proposed $700 billion rescue of the U.S. financial system has been stalled in Congress.

The yield on the two-year security posted its first weekly decline in September on concern that a delay in the passage of the bailout plan will cause further harm to the U.S. economy. The U.S. is Canada's largest trading partner.

"``Markets are still holding on to the hope that the rescue plan will be rescued and possibly today, but for now they are quite nervous and we are seeing a strong flight to quality into government bonds in the U.S. and Canada,'' said Sal Guatieri, senior economist at BMO Capital Markets in Toronto."

"The yield on the two-year government bond declined 8 basis points, or 0.08 percentage point, to 2.80 percent at 2:22 p.m. in Toronto. It has fallen from 2.88 percent on Sept. 19. The yield has increased 9 basis points so far this month. The price of the 2.75 percent security due in December 2010 rose 17 cents to C$99.91."

The 10-year government note's yield fell 3 basis points to 3.66 percent. It has declined from 3.69 percent on Sept. 19. The yield has increased 13 basis points in September. The price of the 4.25 percent note maturing in June 2018 climbed 27 cents to C$104.81.

`Temporary Delay'

"``Expectations may have been a little bit high in terms of how quickly this package could get through,'' said Paul Ferley, assistant chief economist at Royal Bank of Canada in Toronto. ``Time is of the essence. Hopefully, this will prove to be a temporary delay, and the politicians are going to realize the seriousness of the situation.''"

"Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history. WaMu customers withdrew $16.7 billion since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said yesterday."

"``Markets realize how dire the situation is in the U.S.,'' Guatieri said. ``They realize the longer the rescue plan is delayed, the greater the risk to financial markets and the U.S. economy, and by implication the global economy.''"

"The 10-year bond yielded 86 basis points more than the two-year security, down from 92 basis points on Sept. 18."

"The two-year bond's yield will rise to 2.95 percent by the end of this year, while the 10-year bond's yield will increase to 3.77 percent, according to the median forecasts of economists surveyed by Bloomberg News."

"The yield advantage of the 10-year U.S. Treasury note compared with similar-maturity Canadian government bonds is 15 basis points, up from 3 basis points on Sept. 18. The Canadian 10-year bond yielded 36 basis points more than its U.S. counterpart on Jan. 22."

"Canadian government bonds and U.S. Treasuries have returned 4.2 percent in 2008, according to Merrill Lynch & Co. index statistics."

"The Canadian currency was little changed at C$1.0338 per U.S. dollar, from C$1.0348 yesterday. One Canadian dollar buys 96.73 U.S. cents. It strengthened for a fourth week, increasing 1.3 percent versus its U.S. counterpart since Sept. 19."

"Canada's dollar will slip to C$1.12 against the U.S. dollar by the end of 2009, according to the median forecast of 33 economists surveyed by Bloomberg News."

"Sept. 26 (Bloomberg) -- U.K. government bonds posted a weekly advance as U.S. lawmakers failed to broker a deal on a $700 billion plan to buy troubled assets from financial institutions, prompting investors to seek the safest assets."

"Two-year notes advanced for a second week as congressional leaders were deadlocked over the details of a rescue plan that would calm markets. The Bank of England, along with regional central banks, said it agreed to allow lenders to borrow dollars from them for a week in a fresh effort to ease money markets."

"``We are just caught in the ebb and flow related to the announcement of the U.S. package,'' said Sean Maloney, a fixed- income strategist in London at Nomura International Plc. ``Gilts may grind a little higher but we can't get carried away because sentiment is very fragile.''"

"The yield on the 10-year note fell 5 basis points in the week to 4.55 percent as of 4:20 p.m. in London. The 5 percent security due March 2018 gained 0.41, or 4.1 pounds per 1,000- pound ($1,840) face amount, to 103.43. The yield on the two-year note declined 13 basis points to 4.24 percent. Bond yields move inversely to prices."

U.K. Prime Minister Gordon Brown urged Congress yesterday to back the plan for financial companies as European finance ministers expressed concern market turmoil will damage the world economy. Brown is scheduled to meet President George W. Bush today to discuss the economy.

Demand for the safety of government debt increased as stock markets worldwide dropped. The MSCI World Index fell 1.6 percent and the U.K.'s FTSE 100 Index declined 1.7 percent.

Extend Gains

Gilts extended their gains after comments by Republican Senator Richard Shelby on the bailout plan and the release of lower-than-expected U.S. economic-growth figures.

Shelby suggested in an interview with CNBC that opponents of the Paulson bailout were in no hurry to reach an agreement. He said the plan was ``flawed'' and that he could let markets open on Monday without a deal.

"They also rose after figures showed the U.S. economy grew 2.8 percent in the second quarter, less than the 3.3 percent forecast by economists surveyed by Bloomberg."

"HSBC Holdings Plc, Europe's largest bank by market value, cut 1,100 jobs in its global banking and markets division as the deepening financial crisis threatens to extend a decline in profit. Money market rates have soared as banks have all but stopped lending to each other. The three-month London interbank offered rate, or Libor, that banks charge each other for borrowing dollars stayed near the highest level since January."

Central Banks

"With the cost of borrowing dollars jumping, the European Central Bank, Swiss National Bank and Bank of England began auctions today totaling $74 billion in one-week funding. The Bank of England said it loaned $30 billion in one-week loans and $10 billion overnight."

"Bank of England policy maker Andrew Sentance said today members of the Monetary Policy Committee face a ``difficult balancing act'' in setting rates to tame prices while growth slows, the Leicester Mercury newspaper reported. There is a threat the fastest inflation in a decade may persist even as the financial crisis raises the chance of the bank undershooting its target for consumer prices, policymaker Kate Barker said yesterday."

"The pound climbed against the dollar, headed for a third weekly gain. The British currency advanced to $1.8401 per dollar, from $1.8372 yesterday, and is 0.4 percent higher in the week. Against the euro, the pound rose to 79.31 pence per euro, from 79.50, trimming its weekly loss to 0.4 percent."

Expect Volatility

"``The major event of the day for sterling is coming from the U.S.,'' said Ian Stannard, a currency strategist in London at BNP Paribas SA, the most accurate currency forecaster in a 2007 Bloomberg News survey. ``Until a deal is agreed we can expect volatility and some spikes to the upside.''"

"The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, gained 0.1 percent in the week to 87.48, according to Deutsche Bank AG. The gauge has dropped 7.6 percent in 2008."

British policy makers kept the benchmark interest rate unchanged on Sept. 4 as they weighed the risks of accelerating inflation against the danger that mounting bank losses will push Europe's second-biggest economy into a recession. The next Bank of England decision is Oct. 9.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.netLukanyo Mnyanda in London at lmnyanda@bloomberg.net;

"Last Updated: September 26, 2008 11:25 EDT"

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"New Zealand Economy Shrank 0.2%, Confirming Recession (Update3) "

By Tracy Withers

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"Sept. 26 (Bloomberg) -- New Zealand's economy contracted last quarter, confirming the nation is in its first recession in 10 years and adding to the prospect the central bank will cut interest rates next month."

"Gross domestic product fell 0.2 percent from the first quarter when it declined 0.3 percent, Statistics New Zealand said in Wellington today. The median expectation in a Bloomberg News survey of 13 economists was for a 0.5 percent contraction. From a year earlier, the economy grew 1 percent."

"Reserve Bank Governor Alan Bollard has cut the benchmark interest rate by three quarters of a point to 7.5 percent since July to try to kick-start the economy. Facing a contraction again in the third quarter and fresh turmoil in global financial markets, most economists say Bollard will lower rates by a half- point on Oct. 23 with a fourth reduction likely in December."

"``The Reserve Bank of New Zealand is going to cut rates again in October,'' said Stephen Walters, chief economist JPMorgan Chase & Co. in Sydney. ``Since they cut by half a point earlier this month, things have gotten a lot worse globally. So there's a case for them to keep going at that rate.''"

"The New Zealand dollar rose to 68.66 U.S. cents at 11:55 a.m. in Wellington from 68.17 cents before the report was released, gaining because the contraction was less than forecast by economists. The currency has fallen almost 12 percent this year. The five-year government bond yield was little changed at 5.60 percent."

Rate Outlook

"``This recession won't be as bad'' as the 1998 slump, said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney. ``This could be a relatively smaller easing cycle.''"

The second-quarter contraction matched the central bank's forecast. Bollard expects the economy will shrink again in the three months ended Sept. 30. Eight of 10 economists surveyed by Bloomberg also predict a third-quarter contraction and the Treasury Department said Sept. 8 it couldn't rule out the possibility.

"Finance Minister Michael Cullen said today the contraction is a ``temporary disappointment'' and the economy will recover in the fourth quarter. ``New Zealand's economic prospects are healthy and strong,'' he said in an e-mailed statement."

"Bollard cut the record-high official cash rate in July by a quarter point to 8 percent, his first reduction in five years, when most economists expected no change. He followed on Sept. 11 with a half-point cut to 7.5 percent when all but one analyst forecast a quarter-point change."

Consumer Confidence

Ten of 14 economists expect a half-point cut to 7 percent next month. The rest tip a quarter-point reduction.

"Consumer confidence fell to a 17-year low in the second quarter as food prices soared, fuel costs reached a record and home-loan interest rates remained at an all-time high."

"``A clear shift in consumer sentiment occurred during this period, which placed significant pressure on retail sales, with margins coming under further pressure as retailers sought to clear seasonal inventories,'' Ian Morrice, chief executive officer at Warehouse Group Ltd., said this month."

"Auckland-based Warehouse Group, the nation's biggest discount retailer, reported a 52 percent plunge in profit in the six months ended July 27."

"The second straight quarterly contraction in gross domestic product was led by a slump in consumer spending, home building and exports, the statistics agency said."

"Household spending, which makes up 60 percent of the economy, fell for a second straight quarter, the first successive decline in 16 years."

Business Investment

"Purchases of durable items declined 0.7 percent, led by cars. Spending on alcohol, food and other so-called non-durable goods declined 0.8 percent. Spending on health, travel and other services rose."

"New Zealanders are buying fewer cars, computers and appliances as they pay higher interest costs on their mortgages and credit cards. A borrower seeking a two-year fixed home loan faced a rate of 9.2 percent in June compared with 8.3 percent two years earlier."

"Spending on new housing fell 8.2 percent in the second quarter, the third straight decline, the statistics agency said."

"Business investment increased, led by a 16 percent jump in spending on plant, machinery and equipment amid demand from the oil industry. Commercial construction slipped. Inventories held by retailers and the distribution industry rose."

"Farmers produced 4.3 percent less milk in the year ended June 30 because of a drought, Fonterra Cooperative Group Ltd., the world's largest dairy exporter, said this week. Dairy exports declined 18 percent in the second quarter. Sales of butter, cheese and milk powder make up one-fifth of New Zealand's exports."

Farm production fell 0.6 percent in the second quarter as the drought forced many farmers to stop milking cows. Mining and forestry output also dropped.

"Manufacturing increased 1.4 percent, rebounding from a first-quarter slump as farmers sent livestock to slaughter as feed diminished. The construction industry dropped 3.8 percent, led by home building."

"The GDP deflator was 4.8 percent in the year ended June 30, the statistics agency said."

"Buzzi Unicem SpA (BZU IM), Italy's second-biggest cement maker, fell to the lowest in more than three years, losing 58.8 cents, or 4.9 percent, to 11.37 euros. The shares are ``likely factoring in an overly pessimistic scenario in which eastern European countries undergo a significant slowdown and activities in mature countries do not recover even in 2010,'' Maurizio Moretti, an analyst at UniCredit Markets & Investment Banking who rates Buzzi Unicem a ``buy,'' wrote."

Construction stocks were the third-worst performers among the 18 industry groups in the Dow Jones Stoxx 600 Index today.

"Digital Multimedia Technologies SpA (DMT IM), the Italian maker of television transmission systems, rose for the first time in four sessions, increasing 24.8 cents, or 1.4 percent, to 17.43 euros. The company said it pulled out from buying a stake in Wind Telecomunicazioni SpA and 3 Italia SpA's broadcasting tower venture."

"Fiat SpA (F IM), Italy's largest manufacturer, slumped 36.5 cents, or 3.5 percent, to 10.13 euros. Merrill Lynch & Co. cut its price estimate on the stock to 9 euros from 10 euros after lowering its western European volume assumptions. The brokerage now forecasts a 6.1 percent decline in 2008 and a 5.1 percent decline in 2009."

"Luxottica SpA (LUX IM), the world's biggest maker of eyeglasses, dropped 70.3 cents, or 4 percent, to 16.79 euros. ``The recent out-performance is not merited,'' Louise Singlehurst, an analyst at Morgan Stanley, wrote in a research report. ``Management may struggle to meet its 100 million euros of operating synergies from the Oakley integration targeted by 2010.''"

"Saes Getters SpA (SG IM), the world's biggest maker of a key chemical used in televisions and computer monitors, declined to the lowest since July, losing 73.6 cents, or 5.3 percent, to 13.11 euros. Banca Imi downgraded the stock to ``hold'' from ``add.''"

"STMicroelectronics NV (STM IM), Europe's largest semiconductor maker, sank 27.2 cents, or 3.6 percent, to 7.34 cents. Research In Motion Ltd., maker of the BlackBerry e-mail phone, fell the most in almost eight years after competition from Apple Inc.'s new iPhone curbed its profit forecast for the second quarter in a row."

"Telecom Italia SpA (TIT IM) surged 2.3 cents, or 2.1 percent, to 1.13 euros. The Libyan Investment Authority and sovereign funds from Qatar, Kuwait and Russia are interested in buying a stake in the Italian biggest phone company, Corriere della Sera reported, without saying how it got the information."

"``Current rumors are distracting investors from Telecom Italia's fundamentals and the outlook that remains weak, with very low visibility on strategy,'' Cheuvreux analyst Giovanni Montalti wrote in a research report."

"Sept. 26 (Bloomberg) -- HSBC Holdings Plc, the bank with the biggest branch network in Hong Kong, will offer smaller discounts to new mortgage customers in the city because of higher funding costs."

"Clients applying for mortgages exceeding HK$1.5 million ($193,000) will get discounts of 200 basis points on HSBC's prime rate, down from 250 basis points, spokeswoman Vinh Tran said by phone today. The London-based bank will offer discounts of 175 basis points on smaller mortgages, she said."

"The change, effective from Sept. 29, was made ``in light of higher interbank rates,'' Tran said."

"Banks worldwide are charging each other more to borrow money because of increasing concerns about repayment following the collapse of lenders including Lehman Brothers Holdings Inc. and Washington Mutual Inc. The 3-month Hong Kong interbank offered rate was quoted at 3.395 percent today, after rising 0.3414 percentage points this week, according to Bloomberg data."

Sept. 26 (Bloomberg) -- Government bonds around the world rose after talks on a $700 billion rescue package for the U.S. financial system stalled and Washington Mutual Inc. was taken over in the biggest U.S. bank failure in history.

U.S. two-year Treasuries headed for a fifth week of gains and German notes of the same maturity posted their biggest weekly advance since the September 2001 terrorist attacks. Japanese 10-year bonds rallied for a second day.

"``Clearly the focus is on the vacillations of U.S. Congress,'' said John Stopford, who oversees about $12 billion in assets as the London-based head of fixed-income at Investec Asset Management. ``We've taken a defensive position in the short term. We and others are increasingly accumulating a large pool of overnight deposits.''"

"Investors are piling in to the safest assets on concern delays to the bailout plan will cause more banks to fail. At the same time, the short-term debt markets that provide financing for the global economy are seizing up. The Libor-OIS spread, a measure of the availability of cash among banks, widened for a fifth day to near a record today."

"U.S. lawmakers were meeting again today in Washington after some House Republicans, led by Virginia's Eric Cantor, said they wouldn't back a plan based on Treasury Secretary Henry Paulson's approach. The stalemate came after an unprecedented meeting of the two presidential candidates, President George W. Bush, congressional leaders and Cabinet officers."

`Changed Perception'

"``What has changed is the market's perception of the bail- out package and whether or not it proceeds in its original form,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country's largest bank. ``The market has come to focus on the underlying problems, rather than the short-term solution.''"

"The yield on the two-year U.S. Treasury note fell 15 basis points to 2.02 percent as of 12:30 p.m. in New York, taking its decline in the past five weeks to 38 basis points. Two-year German yields dropped 18 basis points to 3.66 percent and Japanese 10-year yields lost 2 basis points."

"``It's gloomy because the bailout package was seen as the cavalry coming over the hill,'' said Richard McGuire, a senior fixed-income strategist at RBC Capital Markets in London. ``The safe-haven bid for fixed income has returned.''"

Central banks have so far failed to unlock the credit markets and get banks to lend to each other again. The European Central Bank lent banks $35 billion for seven days today. The Bank of England loaned $30 billion of one-week cash as well as $10 billion overnight.

Balking at Lending

"Financial institutions are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. The yield on bonds sold by Morgan Stanley maturing in three months' time was almost 37 percent today, up from 4.07 percent two weeks ago."

Few strategists and analysts predicted the gains in government bonds of the past two weeks. The two-year U.S. note today yielded 14 basis points less than 2.16 percent median forecast of 31 analysts in a Bloomberg survey for the end of the third quarter. The forecast was 2.60 percent in August.

"The London interbank offered rate, or Libor, that banks charge each other for three-month loans stayed near the highest level since January today, the British Bankers' Association said. The euro rate, or Euribor, for such loans rose to the highest level since the single currency was introduced in 1999, according to the European Banking Federation."

China Curbs

"The Libor-OIS spread, which compares the cost of borrowing in dollars over three months with the overnight indexed swap rate, widened 13 basis points to 208 basis points, after exceeding 200 basis points for the first time yesterday."

"Concern about more failures among financial institutions prompted domestic Chinese banks to cut trading with foreign firms in the interbank market, according to Zhuang Zhiqiang, a trader at Xiamen International Bank Co., which is partly owned by the Asian Development Bank. The move aims to control risks after the bankruptcy of Lehman Brothers Holdings Inc., said Zhao Qingming, an analyst in Beijing at China Construction Bank Corp., the nation's second-largest lender."

Washington Mutual became the U.S. biggest bank failure in history yesterday after being seized by regulators and sold to JPMorgan Chase & Co. following $16.7 billion of customer withdrawals since Sept. 16. Financial institutions worldwide posted $522 billion of losses and writedowns tied to U.S. subprime mortgages since the start of 2007.

"Waning demand for emerging-market assets widened the difference in yield, or spread, between U.S. Treasuries and the bonds of nations from Brazil to Ukraine by 10 basis points to 377 basis points, according to a JPMorgan Chase & Co. index."

"Fortis, the Brussels and Amsterdam-based financial-services company, said the bank's financial position is ``solid,'' seeking to stem a sell-off that's driven the stock down 35 percent this week. Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it needs to bolster capital, and may even need more as financial markets deteriorate."

Favoring T-Bills

"The U.S. commercial paper market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, the Federal Reserve said yesterday, a further sign of investor reluctance to take on higher-risk assets."

"Three-month U.S. Treasury bill yields fell to 0.36 percent on Sept. 24 as demand for the shortest-dated government debt surged. The rate, which declined to 0.02 percent last week, the lowest since World War II, was at 0.85 percent today."

"The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 11 basis points to 291 basis points. It was as much as 337 basis points yesterday, the most since Bloomberg began compiling the data in 1984. From 2000 to 2007, before the credit crisis began, the spread averaged 31 basis points."

Sept. 26 (Bloomberg) -- India's 10-year bonds had the biggest weekly loss in more than two months after the government sold debt at higher-than-expected yields.

"Benchmark notes completed a second weekly decline after India auctioned 13-year bonds at a yield of 9.04 percent, higher than 8.9 percent expected traders surveyed by Bloomberg News. Bonds also fell after primary dealers that underwrote the sale had to buy more than 16 percent of the notes, indicating investors didn't buy all the securities on offer."

"``The auction outcome shows investors appetite is weaker than many people thought,'' said Krishnamoorthy Ramanathan, who manages $1.9 billion in Indian debt at ING Investment Management Pvt. in Mumbai. ``This isn't going to be good for the market sentiment in the coming days. We are staying light on bonds.''"

"The yield on the benchmark 8.24 percent note due April 2018 rose 20 basis points this week to 8.59 percent as of the 5:30 p.m. close in Mumbai, according to the central bank's trading system. The price fell 1.27 per 100 rupee face amount to 97.73."

"The government sold 60 billion rupees of the 7.94 percent notes due 2021 at a cut-off price of 91.81 rupees per 100-rupee face amount, or 9.0369 percent yield, the Reserve Bank of India said in a statement in Mumbai. It also sold 40 billion rupees of 8.28 percent notes due 2032 at 90.65 rupees, or 9.2628 percent yield, the central bank said."

Bonds also fell after a government report showed yesterday the nation's inflation rate held near a 16-year high.

"The Ministry of Commerce and Industry said yesterday in New Delhi that wholesale prices rose 12.14 percent in the week to Sept. 13 from a year earlier, matching the previous week's gain. The rate, which has tripled this year, touched a peak of 12.63 percent, the highest since 1992, in August."

"The cost of benchmark Indian interest-rate swaps, or derivative contracts used to guard against rate fluctuations, fell. The five-year swap rate, a fixed payment made to receive floating rates, declined 12 basis points this week to 8.17 percent."

"Sept. 26 (Bloomberg) -- Crude oil fell, leading energy futures lower, after negotiations over the $700 billion financial bailout plan stalled, adding to concern that U.S. economic growth in the world's biggest energy-consuming country will falter."

"Oil prices dropped as much as 3.5 percent after House Republicans rejected the proposed rescue of the U.S. financial system, imperiling an agreement hours after an announcement that one was near. U.S. fuel demand over the past four weeks was down 5.3 percent from last year, a government report showed this week."

"``The oil market is at the mercy of what is going on in Washington,'' said Gene McGillian, an analyst at TFS Energy LLC in Stamford, Connecticut. ``If there isn't an agreement, prices will drop further because the economy will slow further and demand destruction will continue.''"

"Crude oil for November delivery fell $1.25, or 1.2 percent, to $106.77 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Prices are down 28 percent from the record $147.27 a barrel reached on July 11."

"Gasoline for October delivery declined 3.52 cents, or 1.3 percent, to $2.6621 a gallon in New York. Heating oil fell 3.18 cents, or 1.1 percent, to $2.994."

"Oil prices may decline next week, according to a survey of analysts by Bloomberg News. Fourteen of 29 analysts, or 48 percent, said prices will decrease through Oct. 3."

"The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, slower than the previous estimate, as consumer spending and trade contributed less to growth, the Commerce Department said today in Washington. The revised figures were down from an estimate of 3.3 percent last month."

GDP Forecasts

"Economists at JPMorgan Chase & Co. and Morgan Stanley this week cut third-quarter Gross Domestic Product forecasts, and Federal Reserve Chairman Ben S. Bernanke warned the economy may falter without the $700 billion bank rescue. The U.S. was responsible for 24 percent of global oil consumption last year, according to BP Plc."

"Alon USA Energy Inc. restarted the fluid catalytic cracking unit at its Big Spring, Texas, refinery so the plant can resume full processing capacity of 70,000 barrels a day. Total SA, Europe's third-largest oil company, said it restored power to its Port Arthur refinery in Texas after Hurricane Ike, and plans to restart the plant."

Royal Dutch Shell Plc said it will delay planned maintenance on U.S. Gulf Coast refineries following hurricanes Gustav and Ike this month.

"The Organization of Petroleum Exporting Countries will step in and cut oil production to keep crude oil from falling below $100 per barrel, Ecuadorean President Rafael Correa said today in a television interview on the ETV Telerama network."

"Ecuador, the producer group's smallest member, has struggled to meet its daily output quota of 520,000 barrels in recent months. OPEC members produce more than 40 percent of the world's oil."

"Sept. 26 (Bloomberg) -- Emerging-market bonds fell, led by losses in Argentina and Russia, after negotiations stalled in the U.S. Congress over a $700 billion financial rescue package."

"The extra yield investors demand to own developing-nation debt instead of U.S. Treasuries widened 7 basis points to 3.74 percentage points at 10:49 a.m. in New York, according to JPMorgan Chase & Co. A basis point equals 0.01 percentage point. The so-called spread is the biggest since Sept. 18."

"Investors shunned higher-yielding securities as Republicans were divided over the bank bailout plan, putting in danger an agreement hours after a bipartisan group of negotiators and the White House said they were closing in on one."

"``The prospects of seeing a plan in the short term are deteriorating by the minute,'' said Luis Costa, an emerging- markets debt strategist at Commerzbank AG in London. ``The stepping stone for a recovery is the Treasury plan.''"

"Russia's bonds also fell after Moody's Investors Service assigned a ``negative'' outlook to the country's banking system as it grapples to contain its worst crisis since the 1998 default. The spread on the country's debt swelled 11 basis points to 3.04 percentage points, according to JPMorgan."

"The cost of protecting Argentine bonds, among the highest- yielding in emerging markets, rose the most since Sept. 17. The country's five-year credit default swaps jumped 21 basis points to 9.17 percentage points, according to Bloomberg data. That means it costs $917,000 to protect $10 million of the country's debt from default."

Credit-Default Swaps

"Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent."

"Mutual funds that invest in emerging-market debt experienced a record weekly outflow of $1.7 billion during the week that ended Sept. 24, according to data from Cambridge, Massachusetts-based Emerging Portfolio and ING Bank NV."

"So far this year investors have pulled $5.4 billion from funds that invest in dollar-denominated debt sold by developing nations. Emerging-market dollar bonds have lost 4 percent so far this month, according to Merrill Lynch & Co.indexes."

"``There's a clear shifting of allocations into safe spots,'' Costa said. ``Emerging-market countries continue to suffer on the back of the strongest peak in risk aversion we've seen since the Russian default.''"

"Sept. 26 (Bloomberg) -- Industrial & Commercial Bank of China Ltd., the world's largest bank by market value, is seeking to boost fee income and loans to small companies after a cut in interest rates eroded margins, Chairman Jiang Jianqing said."

"The central bank's 27 basis-point cut in the benchmark one- year lending rate on Sept. 15 will reduce ICBC's profit by as much as 500 million yuan ($73 million) this year, Jiang told reporters in Tianjin today, ahead of the World Economic Forum. The cut may have a ``bigger impact'' on profit in 2009, he added."

"``The cut will have a 400 million to 500 million yuan profit impact on us this year,'' Jiang said. ``We are increasing our pricing ability for loans, boosting fee income and adjusting our loan structure to remedy the rate cut.''"

"Chairman Jiang Jianqing has more than doubled ICBC's profit since 2005 as annual economic growth of more than 10 percent bolstered corporate loans and services to the nation's growing number of wealthy people. While ICBC's domestic bias shielded it from the U.S. subprime crisis, reductions in lending rates may hurt profits on loans in China."

"ICBC became the world's most profitable bank after earning a record 64.5 billion yuan ($9.4 billion) in the first half, topping the $7.72 billion earned by closest rival HSBC Holdings Plc. Full-year profit may reach 120 billion yuan at the state- controlled lender, according to a consensus estimate."

"Chinese banks were downgraded after the rate cut at JPMorgan Chase & Co., Credit Suisse Group and Merrill Lynch & Co., which cited less profitable lending and higher bad-loan costs in a slowing economy."

Lending Rate Cut

"The central bank cut borrowing costs for the first time in six years after economic growth slowed for four consecutive quarters and inflation eased, leaving the deposit rate unchanged. It raised rates six times last year. Consumer price gains cooled to 4.9 percent in August, the slowest pace since June 2007."

"``Chinese banks appear to be approaching their first real test of resilience,'' Beijing-based Fitch Ratings analysts Charlene Chu and Chunling Wen wrote in a Sept. 23 report. ``Increased vigilance is warranted as Chinese banks take on the growing challenges ahead.''"

"After a government bailout three years ago, ICBC is now the world's biggest bank by market value and earned a record 64.5 billion yuan in the first half. It has 16,476 branches nationwide and 112 outside China, and 170 million personal customers -- equivalent to the populations of Russia and Canada combined."

"ICBC will be ``cautious'' in buying U.S. debt to avoid losses, and will consider cutting or keeping its subprime holdings depending on prices, Jiang said today. The lender was ``lucky'' not to have held too much of such securities, he added."

`Necessary' Measures

"The U.S. government's measures are ``necessary'' to stop a crisis that may not have bottomed out yet, Jiang said, referring to the bailout of American International Group Inc. and a proposed $700 billion rescue package for the financial sector."

"Banks should be more ``sensitive'' to risks on the global financial markets and improve controls amid the turmoil, Liu Mingkang, chairman of the China Banking Regulatory Commission, said in a speech posted on the regulator's Web site on Sept. 25."

"Shares of ICBC fell 0.5 percent to close at 4.35 yuan in Shanghai, extending this year's loss to 46 percent. The stock rose 1.3 percent to close at HK$4.74 in Hong Kong."

To contact the reporter for this story: Luo Jun in Shanghai at at jluo6@bloomberg.netZhao Yidi in Beijing at at yzhao7@bloomberg.net

"Last Updated: September 26, 2008 04:36 EDT"

Sponsored links

"Jubarte May Have 4 Billion Barrels, State Governor Tells Estado "

By Joao Lima

"Sept. 26 (Bloomberg) -- The Jubarte field in Brazil's Campos Basin may have oil and gas reserves equivalent to half the volumes found at Tupi, Estado de S. Paulo reported, citing Espirito Santo State Governor Paulo Hartung."

"Jubarte may have 2 billion barrels of heavy oil above its layer of salt and a further 2 billion barrels of light oil in the so-called pre-salt area, Hartung told the Brazilian newspaper in an interview."

"Sept. 26 (Bloomberg) -- Asian currencies fell, led by the Philippine peso, on concern investors will shun the region's assets as negotiations on a proposal to inject $700 billion into U.S. financial markets stalled."

All 10 of the most-traded Asian currencies declined after U.S. lawmakers splintered over a proposed rescue plan to alleviate the credit squeeze. Senate Banking Committee Chairman Christopher Dodd said an agreement he reached earlier in the day with some Republicans was later undermined by a proposal offered by House Republicans led by Representative Eric Cantor.

"``We've got some impact from a sudden turn of sentiment that the U.S. Congress may not have actually made some progress as markets had initially thought,'' said Vishnu Varathan, a regional economist at Forecast Singapore Pte. ``The side of the coin that Asians will look at is the risk aversion bit and that doesn't bode well for the peso.''"

"The Philippine currency dropped 0.6 percent to 46.745 per dollar at the 4 p.m. close of trading in Manila, according to the Bankers Association of the Philippines."

"Malaysia's ringgit fell for a fourth day on concern export growth will slow after U.S. government reports showed new home sales and orders for durable goods declined in August and jobless claims rose. Malaysia shipped 13 percent of its exports to the U.S. in the first seven months of the year, making it the second-biggest overseas market after Singapore."

`Shaky' Markets

"``The chances of a recession have increased and that's affecting all the key export markets for Malaysia,'' said Wan Suhaimi Saidi, an economist at Kenanga Investment Bank Bhd. in Kuala Lumpur. ``Markets are still on shaky and volatile ground.''"

"The ringgit dropped 0.2 percent to 3.4345 per dollar, according to data compiled by Bloomberg."

"Taiwan's dollar declined for a third day after the central bank unexpectedly reduced interest rates yesterday for the first time since 2003, saying the global financial crisis has heightened the risk of an economic slowdown."

"``In the near term, we could still see some weakness in the Taiwan dollar, mainly because risk aversion remains at very elevated levels,'' said Maya Pinto, an economist at IDEAglobal in Singapore. ``But in the medium to longer term, once the U.S. financial crisis blows over, among the regional currencies we'd expect the Taiwan dollar to outperform again.''"

"The island's currency fell 0.2 percent to NT$32.045 against the U.S. dollar, according to Taipei Forex Inc."

Korean Won Falls

"South Korea's won completed a second weekly decline as U.S. lawmakers disagreed over the finance-industry rescue plan, sapping demand for emerging-market assets."

"The currency extended this year's loss to 19.3 percent, Asia's worst performer, as overseas investors sold more local shares than they bought for a third day this week."

"``Traders turned skittish as the U.S. bailout plan is not likely to be approved anytime soon,'' said Roh Sang Chil, a currency dealer at Kookmin Bank in Seoul. ``With stocks falling sharply, demand for the dollar strengthened further.''"

"The won declined 0.2 percent to 1,160.50 per dollar, according to Seoul Money Brokerage Services Ltd. The currency slid 1.8 percent this week, having touched a four-year low of 1,167 yesterday."

"The Kospi index of local stocks slipped 1.7 percent, snapping a five-day gain."

"Elsewhere, the Singapore dollar lost 0.4 percent to S$1.4281 against the U.S. currency, paring its gain this week to 0.6 percent. The Thai baht was little changed at 33.95, having advanced 0.7 percent this week, Indonesia's rupiah was little changed at 9,391 and Vietnam's dong rose 0.1 percent to 16,600."

"Sept. 26 (Bloomberg) -- The cost of borrowing in dollars for three months stayed near the highest since January after talks on a U.S. bank-rescue plan stalled and regulators seized Washington Mutual Inc., causing institutions to hoard cash."

"The London interbank offered rate, or Libor, that banks charge for such loans fell half a basis point to 3.76 percent today. The euro rate, or Euribor, for three-month loans climbed 2 basis points to 5.14 percent, the highest level since the debut of the currency in 1999. The Libor-OIS spread, a measure of cash availability among banks, widened for a fifth day."

"``It's just a complete breakdown of the interbank lending market,'' said Sean Maloney, a fixed-income strategist at Nomura International Plc in London. ``We are now in a very fear-driven environment. Banks are no longer lending to each other.''"

Money-markets remain frozen after the Federal Reserve joined with central banks worldwide to provide hundreds of billions of dollars in the past two weeks. Negotiations for a $700 billion rescue of the U.S. financial system faltered as some House Republicans said they wouldn't support the plan proposed by Treasury Secretary Henry Paulson.

"Lawmakers were meeting again today as Alabama Senator Richard Shelby, the top Republican on the Senate Banking Committee, said he's willing to let markets open next week without a relief package in place."

"Banks are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. General Motors Corp. on Sept. 19 said it would draw the remaining $3.5 billion from a $4.5 billion revolving credit line from banks, a decision Chief Executive Officer Rick Wagoner described as ``defensive.''"

Libor-OIS Spread

"The Libor-OIS spread, the difference between the three-month dollar rate and the overnight indexed swap rate, widened 11 basis points to 208 basis points, after breaching 200 for the first time yesterday. It averaged 8 basis points in the 12 months to July 31, 2007, before the credit squeeze began."

"WaMu became the biggest bank failure in U.S. history after customers pulled $16.7 billion of deposits since Sept. 16 and its credit rating was slashed to junk as it faced $19 billion of losses on soured mortgage loans. The Seattle-based lender had insufficient liquidity and was unsound, the Office of Thrift Supervision said yesterday in a statement."

"``We struggle from one piece of bad news to the next,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country's biggest bank. ``There is a clear danger of a death spiral here'' if the package doesn't pass through Congress, he said."

Credit Default Swaps

"Fortis, the financial-services company that set out in June to raise 8.3 billion euros ($12.1 billion), tumbled as much as 23 percent in Brussels, extending yesterday's 6.3 percent decline, after De Telegraaf reported that clients of Dutch unit ABN Amro Holding NV may be moving to other banks. Fortis said it has ``no liquidity issue.''"

"Credit-default swaps on Fortis more than doubled to a record 583 basis points as of 4:40 p.m. in London, according to CMA Datavision prices. Contracts on its subordinated debt climbed 416 basis points to an all-time high of 854."

"A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline signals the opposite."

"Stocks, Bonds"

"Yields on the debt of financial companies have soared in the two weeks since Lehman Brothers Holdings Inc. went bankrupt. Morgan Stanley's 3.875 percent security due in January 2009 yielded 41.7 percent today, compared with 3.42 percent on Sept. 12. Goldman Sachs Group Inc.'s 6.65 percent bond maturing in May 2009 yielded 10.9 percent, from 2.74 percent."

"The one-month Euribor rate climbed 3 basis points to 5.01 percent, the highest level since December 2000, data from the European Banking Federation showed. The one-month dollar rate dropped 1 basis point to 3.70 percent, and the overnight rate slid 25 basis points to 2.31 percent, the British Bankers' Association said."

"Stocks fell in the U.S., Europe and Asia and government bonds rose worldwide as concern mounted that a delay to the U.S. rescue package will deepen the credit squeeze, driving the world's biggest economies toward a recession."

Central Bank Lending

"The U.S. economy, the world's largest, expanded at a slower- than-forecast annual rate of 2.8 percent in the second quarter, Commerce Department data showed today. The revised figures compared with a preliminary estimate of 3.3 percent issued last month."

Central banks in Europe said today they will let banks borrow dollars from them for a week in a fresh effort to ease money markets at the end of the quarter.

The European Central Bank lent banks $35 billion for seven days to stabilize financial markets after the collapse of Lehman. The ECB said it received 52 bids for $82.5 billion in the operation. Some 16 percent of bids were awarded at a marginal rate of 4.5 percent.

"With the cost of borrowing dollars over three months jumping yesterday by the most since 1999, the ECB, Swiss National Bank and Bank of England said they will auction a combined $74 billion in one-week funding. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to $290 billion."

`Less Pressure'

"``We saw less pressure because of the cash injections, which helped to relieve some of the tensions on the one-week'' rates, said Alessandro Tentori, a fixed-income strategist in London at BNP Paribas SA. ``But there's still big uncertainty and the market's not happy."

"The cost of borrowing in dollars for a week dropped 3 basis points to 3.97 percent, the BBA said. The rate on such loans for pounds dropped 8 basis points to 5.53 percent, after yesterday reaching the highest since Sept. 17."

"Singapore's three-month interbank offered rate for U.S. dollars rose 9 basis points to 3.778 percent, the highest in eight months. The spread between Australian three-month bank bills and swaps, a gauge of credit risk, increased 5 basis points to 0.935 percentage point, the widest in six months. Rates in Hong Kong fell after a run on the city's third-largest lender ended."

"``The failure of Washington Mutual is likely to be a short- term shock,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``There are no lenders because counterparty risk, the risk whether money that is lent will be returned, is dominating the markets.''"

Financial institutions around the world have posted $557 billion in losses and writedowns on assets linked to U.S. subprime mortgages since the start of last year.

"The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 16 basis points to 286 basis points after earlier widening to 310 basis points. It rose yesterday to the most since Bloomberg began compiling the data in 1984. It was 111 basis points a month ago."

Sept. 26 (Bloomberg) -- The spread between the rate on a two-year interest-rate swap and Treasury yields widened as negotiations on the $700 billion financial bailout plan stalled and Washington Mutual Inc. was seized by regulators.

"The rate charged to exchange fixed for floating interest- rate payments for two years above Treasury yields, known as the swap spread, climbed to as high as 158 basis points from 138.63 yesterday. The spread reached 166.38 basis points on Sept. 24, the widest since 1988, or as far back as Bloomberg compiles data. A basis point is 0.01 percentage point."

Negotiations for the rescue of the U.S. financial system faltered as some House Republicans said they wouldn't support the plan proposed by Treasury Secretary Henry Paulson. WaMu became the biggest bank failure in U.S. history after customers pulled $16.7 billion of deposits since Sept. 16 and its credit rating was slashed to junk as it faced $19 billion of losses on soured mortgage loans.

"``There is a clear danger of a death spiral here'' if the package doesn't pass through Congress, said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country's largest bank. ``We still have enormous tensions in global money markets and money is being hoarded at the ultra short maturities. The problem is fear of counter-party credit worthiness.''"

"The swap spread, which is also driven by expectations for the London interbank offered rate, is the premium charged over Treasury yields to exchange floating for fixed-rate payments. Swap rates are higher than Treasury yields in part because the floating payments are based on interest rates that contain credit risk, such as the Libor. The spread was 150 basis points at 10:25 a.m. in New York"

"``Money markets continue to see significant funding strains, particularly for U.S. dollars, with swap and Libor spreads moving wider again across the major markets,'' Themos Fiotakis, an emerging-market strategist at Goldman Sachs Group Inc. in London, wrote in a report today. ``The ongoing uncertainty surrounding the discussions in Washington may raise'' premiums for risky assets.''"

"Swap rates serve as benchmarks for investors in many types of debt often purchased by buyers using borrowed money, including mortgage-backed securities and auto-loan securities. That means wider swap spreads can push up borrowing costs even if Treasury yields are steady."

"Sept. 26 (Bloomberg) -- Slowing capital inflows into emerging markets because of risk aversion will hit India's rupee the most and China's yuan the least, according to Morgan Stanley."

"Global financial turmoil will keep curbing investments and emerging economies will experience a ``material slowdown,'' Stephen Jen, head of currency strategy at Morgan Stanley in London, wrote in a report yesterday. U.S. lawmakers splintered over a government proposal to inject $700 billion into the country's financial markets, raising concern the rescue plan to tackle the credit-market crisis will be delayed."

"``The latest developments in the U.S. financial markets may have further increased this risk,'' Jen wrote. ``Damage to risk- taking appetite for the entire financial industry is likely to have been very material.''"

Washington Mutual Inc. became the latest victim of the financial crisis that drove Lehman Brothers Holdings Inc. out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos.

"Among the so-called BRIC countries, China is the ``least reliant on fickle inflows'' with ``decent-sized trade surpluses,'' making the yuan the least vulnerable, Jen wrote. India depends on ``footloose'' short-term inflows and received the smallest amount of foreign direct investment, he said."

China's yuan is the best performer among the 10 most-active currencies in Asia outside Japan this year. India's rupee is the worst performer after the South Korean won.

Record Deficit

India has reported shortfalls in its trade account every month since April 2002. The deficit widened to a record $10.8 billion in July. China's trade surplus ballooned to a record $28.7 billion in August.

"Foreign portfolio inflows accounted for 70 percent of the increase in total inflows into India between 2006 and 2007, Jen said in the note. Global funds bought a record $19.5 billion of Indian stocks and bonds in 2007 and sold a net $6.7 billion this year, according to data provided by the Securities and Exchange Board of India."

"The yuan has risen 6.7 percent this year against the dollar and traded at 6.8475 as of 3:10 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The rupee has dropped 15.2 percent this year and was at 46.49 a dollar."

"The reductions in the division's back-office operations amount to about 4 percent of HSBC's wholesale banking workforce, Hong Kong-based spokesman Gareth Hewett said in a phone interview. Global banking and markets includes corporate and investment banking, and markets operations."

"HSBC is adding to the about 120,000 financial jobs lost worldwide since the global credit crisis began just over a year ago, leading to more than $520 billion of writedowns and credit losses. The London-based bank last month posted its steepest profit decline since 2001 on subprime mortgage losses."

"``The financial sector is facing revenue pressure everywhere, and on jobs,'' said Sunil Garg, Hong Kong-based head of Asian financials research for JPMorgan & Chase Co. ``Everybody is trying to right-size their business.''"

"About half the job reductions were in the U.K., Hewett said. The bank trimmed around 100 jobs in Asia, he said. About 450 of the jobs lost were contract positions. HSBC has 335,000 employees."

"``We're taking these steps in the light of the current global business and economic environment and our cautious outlook for 2009,'' Hewett said. ``Markets continue to be challenging and difficult but our strategy leave us well positioned for the next wave of global growth, when it comes.''"

"The wholesale banking division accounted for about a quarter of HSBC's pretax profit in each of the last three years, data compiled by Bloomberg show. The unit's pretax profit fell 35 percent to $2.7 billion in the first half from a year earlier."

"HSBC was one of the first global banks to get burned by the surge in defaults on risky U.S. home loans that ultimately evolved into a credit-market rout. The bank said in February 2007 that loan-loss provisions would exceed analyst expectations. In September last year, HSBC announced it was shutting down its Decision One subprime mortgage unit and eliminating 750 jobs."

"As the credit-market meltdown unfolded, HSBC has emerged in better shape than some competitors. Citigroup Inc. has cut more than 14,000 jobs and posted three straight quarters of losses. UBS AG of Switzerland has shed 7,000 employees as writedowns led to losses in the past four quarters."

Shares Outperform

"HSBC has gained 4.6 percent this year in London trading, compared with a 20 percent drop in the FTSE ASX Banks Index. Citigroup lost 34 percent and UBS tumbled 55 percent."

"HSBC has raised $5.1 billion of capital and reported $27.4 billion of writedowns and credit losses since the beginning of 2007, according to Bloomberg data. Citigroup raised $49 billion and $28.3 billion respectively to shore up their balance sheets."

"Banks and securities firms may step up job reductions after this month's Wall Street upheaval, which saw Lehman Brothers Holdings Inc. go bankrupt, Merrill Lynch & Co. sell itself to Bank of America Corp. and American International Group Inc. get taken over by the U.S. government."

"Washington Mutual Inc. was seized by regulators today in the biggest banking failure in U.S. history. JPMorgan Chase & Co. will buy WaMu's deposits for $1.9 billion after the government shut down the Seattle-based bank amid customer withdrawals of $16.7 billion since Sept. 15, according to the Office of Thrift Supervision. WaMu had ``insufficient liquidity'' and was in an ``unsound'' condition, the OTS said."

Paulson's Plan

"Wall Street fired employees last month at the slowest pace in a year, according to Chicago-based placement company Challenger, Gray & Christmas Inc. That was before the two weeks of calamity that effectively put an end to the investment bank as a standalone business model."

"Concerns that Congress will fail to pass Treasury Secretary Henry Paulson's $700 billion plan to remove illiquid mortgage securities from the banking system has weighted on stocks this week and caused money market rates to soar, as banks began hoarding cash."

"``If Congress doesn't approve the rescue package, I think I'll take up farming,'' Australia & New Zealand Banking Group Ltd. Chief Executive Officer Mike Smith said yesterday. ``Congress has got to understand exactly how important this is to the U.S. economy. There is no choice.''"

Sept. 26 (Bloomberg) -- Turkey's trade deficit widened in August to a record for a single month as higher global energy prices pushed up the import bill.

"The gap grew to $8.1 billion from $5.9 billion in the year- earlier period, the statistics agency in Ankara said on its Web site today. The deficit was forecast at $7.5 billion, according to the median estimate of 10 economists surveyed by Bloomberg."

"Turkey imports about 95 percent of the gas and oil it burns and higher global commodity prices may push the current-account balance to a record $51 billion this year from about $38 billion last year, according to the central bank's latest survey of economists. The widening imbalance threatens to weaken the lira as the global credit crunch reduces foreign investment in Turkey."

"``The growing energy need makes the country more dependent on energy-exporting countries,'' Ozgur Altug, economist for Raymond James in Istanbul, wrote in a note to clients. ``In addition, rising energy prices do not allow an improvement.''"

"Imports increased 31 percent to $19.2 billion, from the year- earlier period, the agency said today. Imports of fuels and oils jumped to $4.5 billion from $2.8 billion a year earlier. Crude oil prices rose to about $120 per barrel in August, compared with about $70 a year earlier. Exports rose 26 percent to $11 billion in August, the statistics agency said."

"Sales to the United Arab Emirates nearly quadrupled from a year earlier, reaching $953 million in August, just short of sales to Turkey's largest trading partner, Germany, which declined 2.5 percent to $1.01 billion."

"The rise in exports to the Middle East reflects an increasing diversity in Turkish markets that may help bolster the country against a slowdown in European growth. Sales to the United Kingdom, the third biggest market, fell 8.6 percent while exports to Iraq, the ninth largest market, increased 48 percent."

"The current-account gap, the broadest measure of trade in goods and services, was $47.1 billion in the 12 months through July, the central bank said on Sept. 10. That's about 7 percent of last year's gross domestic product."

Sept. 26 (Bloomberg) -- Sugar slid in New York for the first time in three days on speculation that demand will slow after the price reached a six-month high.

"Sugar gained 6.7 percent this week through yesterday, the best performance among 19 commodities in the Reuters/Jefferies CRB Index. Brazil and India, the world's largest growers, are producing less, industry and government groups in those countries said this week."

"``It's breaking after a couple of sharp up days, and the market's probably done enough to the upside,'' Anthony Compagnino, a partner at East Coast Options Services Inc. in New York, said today in an interview."

"Raw-sugar futures for March delivery fell 0.07 cent, or 0.5 percent, to 14.48 cents a pound on ICE Futures U.S. in New York. Earlier, the price climbed to 14.72 cents, the highest for a most-active contract since March 5, as the dollar weakened. The U.S. Dollar Index, a measure of the greenback against a basket of six currencies, added as much as 0.2 percent before dropping about 0.1 percent by 2:30 p.m."

"Sugar for October delivery, which had been the most-active contract until Sept. 9, today rose to 13.39 cents a pound, its highest price this month."

"Still, sugar is up about 34 percent this year, the second- best performance on the CRB after cocoa. By comparison, the Dow Jones Industrial Average of 30 stocks has dropped 17 percent."

"The crisis in financial markets may affect global sugar consumption and prices, said Donna Heidkamp, a senior trading adviser at RJO Futures in Chicago."

"``They are talking about demand declining in a few places because of the overall economic slowdown,'' she said."

"Sept. 26 (Bloomberg) -- Prices of high-risk, high-yield loans tumbled to record lows as hedge funds sold assets in the wake of the Lehman Brothers Holdings Inc. bankruptcy filing."

"The price of the average actively traded leveraged loan fell 1.26 cent to 82.48 cents on the dollar, according to Standard & Poor's LCD. Prices have slumped 5.8 cents since Sept. 11, four days before New York-based Lehman filed for bankruptcy."

"``The pressure is the result of hedge fund redemptions, collateral calls, position adjustments due to Lehman's default and the prospect for a large scale liquidation of Lehman's loan holdings,'' CreditSights Inc. analyst Chris Taggert in New York wrote in a report."

"Hedge fund managers are expecting more client withdrawals after average returns fell 8 percent through Sept. 19, the worst first nine months of a year since Chicago-based Hedge Fund Research Inc. started tracking the data in 1990. Hedge funds ``have come to dominate loan market activity since the onset of the credit crunch,'' Taggert said, which will contribute to further price declines."

"Hedge funds have set aside a record $600 billion in cash accounts to deal with client redemptions and heightened market volatility, according to estimates from analysts at Citigroup Inc. That's almost $1 of every $3 under management."

"Lehman, once the fourth-largest U.S. investment bank, had $7.1 billion of high-yield loans and bonds on its books, the company reported Sept. 10."

Price Declines

"Average loan prices have fallen from 94.89 cents on the dollar since the start of the year, according to S&P. The decline has boosted yields over the London interbank offered rate to 841 basis points from 394 basis points, assuming four years to repayment, according to an S&P index. A basis point is 0.01 percentage point. Three-month Libor, a lending benchmark, is currently 3.76 percent, the highest since January."

Price declines will make it harder for junk-rated companies to borrow as investors opt to buy existing debt trading at distressed levels.

The previous low before Lehman's bankruptcy was set in February when prices dropped to 86.3 cents on the dollar. Loans traded above face value until July 2007 when losses on subprime mortgage securities caused investors to reduce purchases of all but the safest securities. Banks were stuck holding $237 billion of loans they'd promised to private-equity firms they needed to sell at discounts.

Lehman's Withdrawal

"Lehman was holding loans it used to help finance leveraged buyouts, according to a list of loans it put up for auction the day it filed for bankruptcy. This included the debt of First Data Corp., TXU Corp. and Tribune Co., the media company taken private by Sam Zell last year. Tribune's loan is quoted as low as 61 cents on the dollar, according to Barclays Capital research."

"Lehman's withdrawal from lending, the acquisition of Merrill Lynch & Co. by Bank of America Corp. and other potential financial company mergers may exacerbate already tight lending conditions, Fitch Ratings said in a Sept. 22 report."

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are trying to persuade Congress to pass legislation to stabilize financial markets that would include the government buying as much as $700 billion of devalued assets.

"The Markit LCDX, a benchmark credit-default swap index that banks and investors use to hedge against losses on leveraged loans fell 0.1 percentage point to a mid-price of 93.6 of face value, according to Goldman Sachs Group Inc. The index falls as credit risk increases."

"High-yield, or leveraged, loans are graded below Baa3 by Moody's Investors Service and lower than BBB- by S&P. Loan creditors are repaid before high-yield bonds in bankruptcy."

Sept. 26 (Bloomberg) -- The Australian and New Zealand dollars declined this week against the greenback and yen as delays to a U.S. $700 billion banks rescue plan curbed demand for higher-yielding overseas assets funded out of Japan.

The Australian dollar fell against the greenback today and New Zealand's currency pared gains as U.S. lawmakers debated a Treasury proposal to use taxpayers' funds to buy soured assets from financial companies. Australia's currency surged 3.7 percent against the dollar on Sept. 19 on reports that the U.S. government would take action to ease a financial crisis that forced Lehman Brothers Holdings Inc. to file for bankruptcy.

"``We bounced sharply last week as the market anticipated some positive news out of the U.S. bailout proposals,'' said Greg Gibbs, a currency strategist at ABN Amro Holding NV in Sydney. ``We haven't had a clear-cut proposal out of the U.S. yet. It's an ongoing debate and so we haven't really had the conditions to drive it on.''"

"The Australian dollar fell 0.5 percent to 88.11 yen at 4:36 p.m. in Sydney from 88.53 in late Asian trading yesterday, extending its decline from 89.60 in New York late on Sept. 19. It traded at 83.20 U.S. cents from 83.57 cents in Asia yesterday and 83.40 in New York last week."

"New Zealand's dollar traded at 72.67 yen from 72.51 yen late in Asia yesterday, down from 74.04 in New York on Sept. 19. It bought 68.62 U.S. cents from 68.46 yesterday and 68.90 last week in New York."

"The currencies fell against the yen this week as the VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock market price changes and a barometer of risk aversion, rose to 35.72 on Sept. 23, close to its highest since October 2002."

Carry Trades

"Benchmark interest rates are 7 percent in Australia and 7.5 percent in New Zealand, compared with 0.5 percent in Japan and 2 percent in the U.S., luring investors to the South Pacific nations' assets. The currencies are favorites with investors using carry trades to seek higher returns using funds from a country with low borrowing costs. The risk is that exchange-rate fluctuations erase profits."

New Zealand's currency rose against the dollar and yen earlier today after a government report showed the economy contracted less than economists forecast in the second quarter.

"Gross domestic product fell 0.2 percent from the first quarter, when it declined 0.3 percent, signaling the nation's first recession in a decade. The median expectation in a Bloomberg News survey of 13 economists was for a 0.5 percent contraction."

Volatile Markets

The Australian and New Zealand dollars have been volatile this week as U.S. lawmakers debated plans to buy assets from financial institutions at above-market prices to spur lending.

"``You've had risk aversion swing around from optimism to pessimism based on the rescue package whether it'll go through or not,'' said Besa Deda, acting chief economist and strategist at St. George Bank Ltd. in Sydney. ``Financial markets are still reasonably illiquid and that's exacerbating the volatility.''"

"The Australian currency may bounce to 85 cents on the passage of the rescue deal, said Gibbs, who recommends selling the currency if it rallies."

"Australian government bonds rose. The yield on the 10-year note fell 11 basis points, or 0.11 percentage point, to 5.614 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 gained 0.827, or A$8.27 per A$1,000 face amount, to 97.148."

The following shares rose or fell in the local market. Stock symbols are in parentheses.

"Air France-KLM Group (AF FP) slipped 22 cents, or 1.4 percent, to 15.62 euros, the first retreat in three sessions. Europe's biggest airline said Chief Executive Officer Jean-Cyril Spinetta will step down after 11 years in the job, to be replaced by Chief Operating Officer Pierre-Henri Gourgeon."

"Dexia SA (DX FP), the world's biggest lender to local governments, fell 82 cents, or 7.5 percent, to 10.07 euros. U.S. and European bank stocks fell as the American government's $700 billion financial rescue plan stalled in Congress and Washington Mutual Inc. collapsed."

"Electricite de France SA (EDF FP) retreated 65 cents, or 1.2 percent, to 52.12 euros, the first decline in three days. Chief Executive Officer Pierre Gadonneix said the government may cut its stake in Europe's biggest power producer over time and will probably retain a majority holding."

"Homair SA (ALHOM FP) tumbled 47 cents, or 14 percent, to 2.90 euros, its steepest-ever drop. The campsite operator said the integration of a mobile-home portfolio will weigh on the 2008 profit margin. Natixis cut its recommendation on the shares to ``add'' from ``buy'' following Homair's statement."

"Leguide.com SA (ALGUI FP) added 50 cents, or 3.7 percent, to 14 euros, the steepest advance in more than three weeks. The owner of Web shopping guides in 12 European countries said first-half net income rose 51 percent to 1.8 million euros."

"Natixis SA (KN FP) dropped 13 cents, or 4.9 percent, to 2.55 euros, for a weekly decline of 17 percent. France's fourth- biggest bank by market value will part with three investment- bank managers because of disagreements over the strategy for restructuring the company, La Tribune reported."

"Societe Francaise Television 1 (TFI FP), owner of France's most-watched TV channel, fell 97 cents, or 7 percent, to 12.87 euros, the most in almost three months. Exane BNP said the shares may decline in coming days as second-half advertising trends ``could turn out to be more difficult than first thought'' because of the financial crisis. An analyst at Berenberg Bank said in a note to clients that TF1 had a ``poor'' September for advertising revenue."

Sept. 26 (Bloomberg) -- European two-year government bonds posted the biggest weekly gain in seven years as investors sought the safest assets after negotiations on a U.S. financial- rescue plan faltered.

Investors piled into short-dated debt as lawmakers in the U.S. prepared to meet for a second day after talks yesterday ended without an agreement. A group of House Republicans led by Eric Cantor of Virginia said they wouldn't back a plan based on the approach outlined by Treasury Secretary Henry Paulson and supported by President George W. Bush. Bonds also gained after Washington Mutual Inc. was taken over by JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

"``The market is reminded once again that this is not a simple piece of legislation,'' Luca Jellinek, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in a note today. ``The news is uniformly friendly'' to the bond market."

"The yield on the two-year note dropped 18 basis points to 3.68 percent as of 5 p.m. in London, taking its drop this week to 33 basis points, the biggest weekly decline since September 2001, when it lost 37 basis points. The 4 percent note due September 2010 rose 0.33, or 3.3 euros per 1,000-euro ($1,464) face amount, to 100.62."

European notes extended their gains after Republican Senator Richard Shelby suggested in an interview with CNBC that opponents of the Paulson bailout were in no hurry to reach a deal. He said the plan was ``flawed'' and that he was prepared to let markets open next week without a deal.

Yield Spread

"The gains pushed the difference in yield, or spread, between two- and 10-year notes to 51 basis points, the widest since April 10, as investors raised bets the financial crisis in the U.S. will crimp economic growth in Europe. The increase was the most since the Sept 11, 2001, terrorists attacks on the U.S."

"European bonds outperformed U.S. Treasuries this quarter on speculation the bailout plan will add to the U.S. government's fiscal burden. Bonds in the euro region handed investors a 2.97 percent return since the end of June, compared with 1.91 percent from their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes."

"Demand for government bonds was also boosted as stocks declined and the cost of protecting European corporate bonds from default rose. The Dow Jones Stoxx 600 Index was down 1.6 percent when trading closed in Europe. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 15 basis points to 590, according to JPMorgan Chase & Co., indicating a deterioration in the perception of credit quality."

Money Markets

"The European Central Bank, Swiss National Bank and Bank of England said today they will auction a combined $74 billion in one-week funding to counter the seizure in money markets. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion."

"Money-market interest rates around the world rose today concern that Paulson's plan will stall, causing banks to hoard cash. The three-month London interbank offered rate, or Libor, that banks charge each other for euro loans jumped to the highest level since the debut of the euro in 1999."

"``Liquidity in cash instruments is absolutely dreadful,'' said Peter Lucas, chief investment officer at Jersey, Channel Islands-based Ashburton Ltd., which manages about $1.7 billion. ``People are very concerned about the risk of defaults. A 1930s- style depression remains a possibility if Congress doesn't produce the goods.''"

French Sales

"Bonds stayed higher after France said today the official estimate of debt sales next year is 135 billion euros, compared with 116.5 billion euros this year. That may be exceeded because of the nation's ``wider'' budget deficit, according to Royal Bank of Scotland Group Plc."

"``I would now estimate actual 2009 issuance close to 145 billion euros,'' said Harvinder Sian, a senior fixed-income strategist at RBS in London. ``The risk on the budget deficit is very clearly on the upside.''"

"Government bond issuance in the euro region will rise next year by 39 billion euros to 672 billion euros, ING Bank NV said in a note to clients."

"``Due to rising redemptions and also the effect the credit crisis is having on the real economy in the form of deteriorating public finances, issuance within the area is expected to increase,'' said Wilson Chin, a fixed-income strategist at ING in Amsterdam."

"Sept. 26 (Bloomberg) -- Sadia SA and Aracruz Celulose SA, two of Brazil's largest exporters, reported losses on bad currency bets, spurring speculation more producers in the commodities-driven economy are at risk from the real's 15 percent tumble since Aug 1."

"Sadia, Brazil's second-biggest food company, fell the most in at least 14 years after the company fired Chief Financial Officer Adriano Lima Ferreira and posted a 760 million-real ($410 million) hedging loss. Aracruz, the world's biggest eucalyptus- pulp maker, slumped the most in a decade as its CFO resigned and the company assessed losses from derivatives investments."

"Latin America's biggest economy, once the darling of emerging-market investors, is losing its luster as global financial turmoil and a drop in prices of the nation's oil, metals and agricultural commodities curbs economic growth. More of Brazil's companies may have been surprised by the real's reversal after it surged 44 percent since the end of 2004, according to CM Capital Markets' Tony Volpon."

"``The fact is there are a lot more of these types of losses out there,'' Volpon, chief economist at the Sao Paulo-based brokerage, said in an e-mail to clients. ``Not exactly good news for a stock market already on the skids.''"

Share Slump

"Sadia, based in Concordia, Brazil, plunged the most since at least August 1994, losing 3.30 reais, or 35 percent, to 6 reais at 5:14 p.m. in Sao Paulo trading. Aracruz lost 1.415 reais, or 17 percent, to 7 reais, the biggest drop since October 1998."

"Cia. Vale do Rio Doce, the world's largest iron-ore producer, may have lost 600 million reais on currency derivatives, Banco Bradesco SA said in an e-mail to clients. The company is in no immediate danger of currency hedge-related losses, said Roberto Castello Branco, the director of investment relations, in a conference call with reporters. Shares of Rio de Janeiro-Based Vale fell 3.7 percent."

"Declines in exporters dragged down Brazil's Bovespa stock index, which slumped 2 percent to 50,782.99, capping its first weekly retreat in three. The real, until early September the biggest gainer this year among the 16 most-actively traded currencies, was unchanged at 1.8445 per dollar."

Brazil was dislodged as the best-performer of the world's 20 biggest equity markets in May as economic growth slowed and borrowing costs began to climb. The benchmark Bovespa index fell as much as 39 percent from its May 29 record to this year's low on Sept. 18.

The drop in commodities prices prompted foreign investors to pull money out of Brazilian stocks in August at the fastest pace since January 2000.

Developing Markets

"The tumble in Brazilian equities has coincided with declines in other of the largest developing markets. The MSCI BRIC index, which tracks stocks of Brazil, Russia, India and China, quadrupled since the end of 2001, when commodities such as oil, iron ore, silver, copper, wheat, sugar and steel began to rally. The index is down 38 percent this year."

"Cia. Siderurgica Nacional may have lost $700 million on an ``ADR swap,'' Bradesco said in the e-mail to clients. Shares of CSN fell 4.7 percent."

"Cosan SA Industria & Comercio, the world's biggest sugar- cane processor, said in a statement it doesn't have ``speculative'' positions in the foreign-currency market."

"Marfrig Frigorificos e Comercio de Alimentos SA also said in a statement to Brazil's securities regulators that it doesn't own leveraged derivatives or similar instruments that aim to reduce its exposure to foreign currencies. JBS SA, the world's largest beef producer, didn't answers calls for comments."

Real Rally

"Brazil's real more than doubled from January 2003 to Sept. 4, more than twice the 47 percent gain of the Canadian dollar, the second-best performer of the major currencies in the period. The real reached a nine-year high of 1.5545 per dollar on Aug. 1 before slumping 26 percent to 1.9606 by Sept. 18."

"Sadia fired Ferreira after he carried out currency-related investments that exposed the company to longer-term risk than policy allows, according to his replacement, Welson Teixeira Jr."

"Aracruz, which plans to merge operations with Votorantim Celulose e Papel SA, said in a statement late yesterday that Isac Zagury resigned as finance chief. The company said today that it hired an outside firm to quantify losses from its currency- related transactions."

`Total Surprise'

"``This came as a total surprise and increases the company's risk in the eyes of investors,'' said Brascan Corretora analyst Denise Messer, who is now revising her 14.60 real share-price forecast and ``market perform'' rating on Sadia."

"Sadia, whose credit rating was cut today by Moody's Investors Service, increased its short- and medium-term debt to help cover the loss, Teixeira said in a conference call today. The company will operate with higher debt levels in coming months and proceed with the majority of its expansion plans, he said."

"The loss was limited to financial transactions and didn't affect operations, Teixeira said. A small part of the loss was related to transactions with New York-based Lehman Brothers Holdings Inc., Teixeira said, without disclosing any details. Lehman filed the biggest U.S. bankruptcy ever on Sept. 14."

"All debt ratings related to Sadia were cut to Ba3, three levels below investment grade, from Ba2, Moody's said today in a statement. The ratings remain under review for possible further downgrade."

Sept. 26 (Bloomberg) -- European stocks fell for a fourth day this week after negotiations on the $700 billion U.S. bank bailout plan stalled and Washington Mutual Inc. was seized in the biggest American bank failure in history.

"Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank, slid 5.7 percent and Dexia SA, the world's biggest lender to local governments, lost 8.1 percent after Republicans said they wouldn't support the proposed rescue plan. Fortis tumbled 21 percent on concern it may struggle to bolster capital. Vestas Wind Systems A/S retreated 9.7 percent after Morgan Stanley cut its recommendation for the largest wind-turbine producer."

"The Dow Jones Stoxx 600 Index decreased 1.9 percent to 265.92, extending the drop this week to 4.4 percent. The measure is down 27 percent in 2008 as more than $550 billion in writedowns and credit losses at banks worldwide pushed the global economy toward a recession."

"``With the bankruptcy of Washington Mutual, the systemic risk has returned,'' said Benoit de Broissia, an equity analyst at Richelieu Finance in Paris, which oversees about $6.2 billion. ``One of the links in the chain has broken so we wonder if the chain is threatened,'' he said in a Bloomberg Television interview."

A group of House Republicans led by Eric Cantor of Virginia said they wouldn't support a plan based on the approach outlined by Treasury Secretary Henry Paulson and backed by President George W. Bush and Democratic leaders. The discord sent Paulson back into a late-night meeting on Capitol Hill with lawmakers. Lawmakers are set to meet again this morning.

"``There's a lot of hesitation on the plan,'' said Pierre- Yves Gauthier, a founding partner at Alphavalue in Paris. ``This stalling is creating more worries. Politics have taken over.''"

"Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S. government's rescue package for the financial system may require as much as $5 trillion, seven times the amount Paulson has requested."

"JPMorgan Chase & Co. bought WaMu's branch network for $1.9 billion after the thrift was seized by regulators. WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan."

Growth Forecast

"The worsening financial crisis will cause the U.S. economy to contract, JPMorgan said after cutting its growth forecast for the current quarter. The economy will stagnate in the three months through the end of September, the bank's economists wrote in a note, revising an earlier prediction of 0.5 percent growth."

"A government report today showed the U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, slower than the estimated 3.3 percent."

"Money-market rates rose worldwide after talks on the rescue plan stalled, deepening concern financial institutions will hoard cash and curb lending. The euro interbank offered rate, or Euribor, for three-month bank loans jumped today to the highest level since the debut of the euro in 1999."

"Fortis, Belgium's biggest financial-services firm by assets, sank 21 percent to 5.18 euros in Amsterdam as De Telegraaf reported clients of Dutch unit ABN Amro Holding NV may be moving to other banks. The stock retreated 35 percent this week."

`Flabbergasted'

"The cost of protecting Fortis bonds from default surged to a record. Chief Executive Officer Herman Verwilst, speaking at a press briefing in Brussels today, said he's ``flabbergasted'' by the decline in the company's stock."

"Bradford & Bingley Plc, the U.K.'s largest lender to landlords, lost 5.9 percent to 20 pence on concern it won't be able to raise money in capital markets."

"Vestas Wind dropped 9.7 percent to 530 kroner. The company had its recommendation cut to ``underweight'' from ``equal- weight'' at Morgan Stanley, which said the stock looks ``unjustifiably expensive.''"

The brokerage also cited ``early signs of softening demand among small developers'' and an increase in raw-material prices.

Rheinmetall AG retreated 6.8 percent to 39.33 euros after Merrill lowered its recommendation for the supplier of weapons for the U.S. Army's Abrams tank to ``neutral'' from ``buy.''

"Insurers, Oil Shares"

"Insurance stocks will remain ``vulnerable to swings in both the credit and equity markets,'' Merrill wrote in a separate report, cutting Aviva Plc to ``neutral'' from ``buy.'' The U.K.'s biggest insurer by premiums fell 3.4 percent to 521.5 pence."

"ING Groep NV and Old Mutual were lowered to ``underperform'' from ``neutral'' by the bank. ING shares lost 7 percent to 17.54 euros, while Old Mutual sank 9.7 percent to 79.3 pence."

SBM Offshore NV slumped 7.4 percent to 15.73 euros after Goldman Sachs Group Inc. downgraded the world's biggest producer of floating oil production platforms to ``sell'' from ``neutral'' and added the stock to its ``conviction sell'' list.

"Sept. 26 (Bloomberg) -- The cost to protect against a default by Wachovia Corp., the fourth-largest U.S. bank, soared to distressed levels after Washington Mutual Inc. was seized by regulators in the biggest U.S. bank failure."

"Credit-default swap sellers demanded 35 percentage points upfront and 5 percentage points a year to protect Wachovia bonds from default for five years, according to broker Phoenix Partners Group. That means it would cost $3.5 million initially and $500,000 a year to protect $10 million in Wachovia bonds, compared with $670,000 a year and no upfront payment yesterday."

"Wachovia's 2006 purchase of Golden West Financial Corp. saddled the company with option adjustable-rate home loans that allow borrowers to make minimum payments less than what they owe, when is then added to their total debt balance. With JPMorgan saying they expect 20 percent losses on WaMu's option ARM portfolio, Wachovia may need to raise $11 billion in capital to protect against losses from its loans, Deutsche Bank AG equity analyst Mike Mayo said in a note to clients today."

"Wachovia is an ``attractive target,'' though ``it's not clear who wants to take them on at this time,'' Bert Ely, president of consulting firm Ely & Co. in Alexandria, Virginia, said today in a Bloomberg Television interview."

"Morgan Stanley broke off merger talks with Wachovia to focus on a partnership with Japan's Mitsubishi UFJ Financial Group Inc., CNBC reported earlier this week."

"``We may yet see that type of deal,'' Ely said. Morgan Stanley, along with Goldman Sachs Group Inc., ``at some point in time need to acquire a large banking franchise, and Wachovia certainly becomes a very attractive target.''"

Wachovia Bonds

"Wachovia's credit-default swaps are trading at levels that imply a 74 percent chance the company will fail within five years, according to a JPMorgan valuation model. That assumes bondholders would receive 30 cents on the dollar in the case of a default."

"Wachovia's $750 million of 4.375 percent bonds due in 2010 plunged 29 cents to 51 cents on the dollar, as of 1:03 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority's bond-pricing service. The yield increased to 51.6 percent, or 49.6 percentage points more than Treasuries with similar maturities."

"Chief Executive Officer Robert Steel, a former Treasury official who was hired to replace Kennedy Thompson in July, has said he's firing workers and cutting more than $1.5 billion in annual costs to cope with mounting losses from the company's loan portfolio."

Morgan Stanley

"Credit-default swaps on Morgan Stanley also rose to distressed levels today, coming close to a record high reached last week after Lehman Brothers Holdings Inc. filed for bankruptcy protection. Morgan Stanley and Goldman both won approval from the Federal Reserve to become bank holding companies, moving away from a business model that investors have deemed too dependent on borrowed money, or leverage."

"Morgan Stanley contracts traded at 18 percentage points upfront in addition to 5 percentage points a year, according to broker Phoenix Partners Group. That compares with 783 basis points a year and no upfront payment yesterday, CMA data show. They earlier traded at a record 22 percentage points upfront, Phoenix prices show."

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

"Goldman, Citigroup"

"Credit-default swaps on other banks also rose today. Contracts on Merrill Lynch & Co., which agreed to sell itself to Bank of America Corp. last week as Lehman collapsed, rose 104 basis points to 425, according to CMA. Goldman contracts rose 87 to 450."

"Contracts on the Markit CDX North America Investment Grade Index, a benchmark gauge of credit risk linked to 125 companies in the U.S. and Canada increased 4 basis points to 165 basis points as of 2:40 p.m. in New York, Phoenix prices show."

"Sept. 26 (Bloomberg) -- Treasuries rose, with two-year notes gaining for a fifth week, as investors sought the safest assets after talks on a U.S. financial-market rescue stalled and Washington Mutual Inc. was seized by regulators."

Two-year debt extended its longest weekly winning streak since February as Washington Mutual became the biggest bank to fail in U.S. history. The Federal Reserve and European central banks said today they conducted another round of coordinated action to ease money-market pressures. Stocks fell after lawmakers failed to reach a deal on Treasury Secretary Henry Paulson's $700 billion plan to support the banking system.

"``The fear bid is in the Treasury market and remains in the Treasury market and will not be alleviated in the short run unless we get this bailout,'' said Mark MacQueen, partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $6.5 billion. ``Volumes are way down in the market -- risk aversion has basically stopped much of the trading.''"

"The yield on the two-year note dropped 10 basis points, or 0.10 percentage point, to 2.06 percent at 2:50 p.m. in New York, according to BGCantor Market Data. The 2 percent security due in September 2010 gained 7/32, or $2.19 per $1,000 face amount, to 99 28/32. The yield has fallen 12 basis points this week and about 35 basis points in five weeks."

President George W. Bush said work continues on the bank rescue plan. He vowed that ``We will rise to the occasion'' and the proposal will be passed. The Standard & Poor's 500 index fell 1.2 percent.

"Rates on the three-month Treasury bill gained 10 basis points after Bush's speech, to 0.85 percent. They rose the most in a week yesterday amid speculation Paulson's plan would be approved by Congress. Rates plunged to an all-time low of 0.02 percent last week."

"The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, down from a preliminary estimate of 3.3 percent issued last month, a Commerce Department report showed. The Reuters/University of Michigan final index of consumer sentiment declined to 70.3 in September, lower than forecast."

"Price swings caused by the uncertainty surrounding Paulson's rescue program pushed Merrill Lynch & Co.'s MOVE index, which measures volatility on Treasury options, to 176.30 yesterday, the most since reaching an all-time high of 178.80 in January."

`In a Nanosecond'

"``At any moment's notice, the market could be down 6 or 7 basis points in a nanosecond,'' said Michael Franzese, head of government-bond trading for Standard Chartered in New York. ``The risk-reward barometer is: trade every senator that talks, wait for him to be finished, and then take your profits if you can, or limit your losses.''"

"Negotiations on the rescue hit a snag when House Republicans offered instead a plan calling for Wall Street firms to purchase insurance on mortgage-backed securities, and advocating tax cuts and looser regulations."

"``This is a very serious problem that goes to the heart of our financial system,'' said E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York. ``They're putting the whole system at risk.''"

"More than 150 U.S. economists, including three Nobel Prize winners, urged Congress to hold off on passing the $700 billion plan until it can be studied more closely."

"Banks have all but stopped lending to each other as they address funding needs at the end of the quarter. The European Central Bank, Swiss National Bank and Bank of England began auctioning a total of $74 billion in one-week funding. The Fed assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion."

"The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans fell 1 basis point today to 3.76 percent, near the highest since January. It jumped yesterday by the most since 1999."

`First of Many'

"The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.91 percentage points from 2.33 percentage points a week ago. The spread touched 3.13 percentage points on Sept. 18, the most since Bloomberg began compiling the data in 1984."

"Washington Mutual is being seen as ``the first of many,'' said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. ``There's going to be other banks following it. Nobody can get funding for anything. That's why Libor is where it is; that's why bills are where they are. It's a massive fear flight.''"

"Wachovia Corp. and National City Corp. led banks lower. A failure to approve a rescue could push stocks further down and stir deeper doubts about banking, Sage Advisory's MacQueen said."

"Treasuries returned 0.24 percent this month through yesterday, putting them on course for the worst four-week performance since they lost 1.2 percent in May, according to Merrill Lynch & Co.'s Treasury Master Index. Treasuries have still outperformed benchmark notes issued by Fannie Mae and Freddie Mac, which were taken over by the government on Sept. 7 and have returned 0.16 percent in September."

Sept. 26 (Bloomberg) -- Borrowing costs among banks in Singapore and Australia rose as regulators seized Washington Mutual Inc. and talks faltered on a government rescue plan for U.S. lenders.

"Singapore's three-month interbank offered rate for U.S. dollars increased 9 basis points to 3.778 percent, the highest in eight months. The spread between Australian three-month bank bills and swaps, a gauge of credit risk, increased 5 basis points to 0.935 percentage point, the widest in six months. Rates in Hong Kong fell after a run on the city's third-largest lender ended."

"``The failure of Washington Mutual is likely to be a short- term shock,'' said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. ``There are no lenders because counterparty risk, the risk whether money that is lent will be returned, is dominating the markets.''"

"Money-market rates signal banks are reluctant to lend to each other as Senate Banking Committee Chairman Christopher Dodd said late yesterday that talks on Treasury Secretary Henry Paulson's $700 billion plan to remove tainted assets from bank balance sheets has hit a snag. The three-month London interbank offered rate that banks charge each other yesterday surged 29 basis points to 3.77 percent, the highest since Jan. 21. A basis point is 0.01 percentage point."

Japan Borrowing Costs

"Japan's overnight call loan rate, the main rate at which banks lend to each other, rose to 0.525 percent at 2:55 p.m. in Tokyo. The rate earlier fell to as low as 0.4 percent after the Bank of Japan injected 800 billion yen ($7.5 billion) at 9:20 a.m. Tokyo time. The Bank of Japan's benchmark lending rate is 0.5 percent."

"The BOJ has injected 15.8 trillion yen in the past eight days into the banking system, the most in at least six years. The Federal Reserve today said it had expanded currency swap lines with the central banks of Europe, Switzerland and England ``to address funding pressure over quarter end.''"

"WaMu, the U.S.'s biggest thrift, was shuttered after customers pulled $16.7 billion of deposits since Sept. 15 and its credit rating was slashed to junk as it faced $19 billion of losses on soured mortgage loans. The Seattle-based lender had insufficient liquidity and was unsound, the Office of Thrift Supervision said in a statement."

"``It's imperative that U.S. policy makers tell us which financial institutions will survive,'' Alex Patelis, London- based head of international economic at Merrill Lynch & Co said in a research note today. ``This could possibly involve blanket government guarantees to unfreeze money markets. Until this uncertainty is resolved, financial institutions will be reluctant to deal with each other.''"

Australian Banks

"Borrowing costs between Australian banks increased for a second day to the highest since Bear Stearns Cos. collapsed in March, as lenders parked a record A$7.4 billion ($6.2 billion) of on-call deposits with the Reserve Bank of Australia, creating a A$658 million shortfall in the money market, the central bank said on its Web site."

"``Markets don't trust each other while the U.S. rescue plan is in a limbo,'' said Jimmy Koh, head of treasury research at United Overseas Bank Ltd. in Singapore. ``The liquidity is all with the good healthy banks.''"

Australia's central bank sold $10 billion through a repurchase operation funded by the Federal Reserve in a bid to boost liquidity of the U.S. currency in local markets.

"Investors bought the one-month dollar swaps at an average rate of 3.165 percent, compared with a minimum bid of 2.35 percent, the Reserve Bank of Australia said in a statement today in Sydney."

Bank Run Ends

"In Hong Kong, the three-month interbank offered rate, or Hibor, fell by the most in a year to 3.395 percent, according to the 11 a.m. fixing by the Hong Kong Association of Banks. The rate jumped 13 basis points yesterday to 3.8 percent, the highest since December 2007."

"The costs on all tenures from overnight to 12 months also fell, the association said. Bank of East Asia Ltd. today said operations are ``quickly returning to normal'' after a two-day run on deposits as the government and central bank backed its financial strength."

"Sept. 26 (Bloomberg) -- The U.S. Treasury should buy senior preferred stock in troubled financial firms, a plan which would save taxpayers money and force shareholders and top executives to pay for failure, said John Paulson, founder of the Paulson & Co. hedge fund management group."

"Writing in the Wall Street Journal, Paulson said Congress should step back and take a few more days to come up with a better rescue plan than spending $700 billion buying risky financial assets."

"He said that buying shares of problem financial institutions would cost less money than the Treasury's rescue plan, and avoid subsidizing healthy banks such as Goldman Sachs Group Inc. and Bank of America Corp., which can still tap private capital."

"Paulson said his proposal is similar to that adopted by the U.S. in its rescue of Fannie Mae and Freddie Mac, and of billionaire Warren Buffett in his Goldman Sachs investment."

"The Treasury's plan would cost taxpayers money right away, and benefit shareholders and executives by buying the banks' weakest investments at prices above the market, he said."

"Too much power would rest with Treasury officials, who would have to decide which bank gets taxpayer benefits, and at what level, the hedge fund manager wrote."

"Fannie and Freddie were rescued, yet management had to step down and give up compensation packages, Paulson said. Shareholders lost dividends, and will bear the brunt of losses, as is appropriate, he wrote."

"By buying senior preferred stock with warrants, the Treasury could stabilize the market, inject capital into companies, and prop up securities, Paulson said."

"The U.S. could also save taxpayer money by limiting its stock purchases to those companies which have no alternative for recapitalization, he wrote."

"The real weakened 1.8 percent to 1.8525 per dollar at 9:53 a.m. New York time, from 1.8206 yesterday. Today's slide extends the real's loss this week to 1.3 percent. Brazil's currency has lost 11.9 percent this month and is the worst performer among the 16 most-actively traded currencies tracked by Bloomberg."

"``Today is a day of low volume and high anxiety levels because of this snag in the U.S. financial package,'' said Paulo Fujisaki, a foreign-exchange strategist at Socopa Corretora in Sao Paulo. ``It's a good day for speculators; we won't really see trades based on fundamentals.''"

"The yield on Brazil's zero-coupon bond due in January 2010 fell 1 basis point, or 0.01 percentage point, to 14.79 percent."

The yield on Brazil's overnight futures contract for January 2010 delivery was little changed at 14.72 percent.

"Brazilian pension funds have posted losses since the collapse of the U.S. subprime market. Previ, Latin America's biggest pension fund, lost 10 billion reais on its stock portfolio in the past year."

"The equity portfolio of the pension funds of employees of Banco do Brasil SA, Brazil's largest state-owned bank, fell to 80 billion reais, the fund President Sergio Rosa told reporters in Rio de Janeiro today."

"Sept. 26 (Bloomberg) -- The U.S. economy expanded more slowly than previously estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified."

"The annual rate of 2.8 percent was down from a preliminary estimate of 3.3 percent issued last month, the Commerce Department said today in Washington. Measures of inflation were higher than previously projected. Personal consumption, trade and business investment contributed less to gross domestic product than the prior estimate, the report showed."

"Americans have since cut back on purchases, businesses have put investment plans on hold, builders have scaled back and credit markets have seized up. Economists at JPMorgan Chase & Co. and Morgan Stanley this week cut third-quarter GDP forecasts and Federal Reserve Chairman Ben S. Bernanke warned the economy may falter without a $700 billion bank rescue."

"``Consumer spending doesn't bode well for overall growth over the next few quarters,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``It's pretty clear now that we are in a recession, and it's a recession that still has some room to run.''"

Treasury Yields

"Treasuries were higher, pushing yields down. The benchmark 10-year note yielded 3.8 percent as of 8:55 a.m. in New York, down 6 basis points from yesterday. Stock futures were lower after negotiations on the bank bailout plan stalled on Capitol Hill."

"Economists had projected growth would remain unchanged at 3.3 percent, according to the median of 76 estimate in a Bloomberg News survey. Forecasts ranged from 3 percent to 3.7 percent. Today's report is the final of three estimates."

The world's largest economy grew at a 0.9 percent pace in the first quarter.

"Today's gross domestic product report showed that the Fed's preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, higher than forecast and faster than the 2.1 percent previously estimated. Prices overall came in less than anticipated."

"The biggest part of the economy, consumer spending, rose at a 1.2 percent annual rate from April through June, weaker than the 1.7 percent estimated last month. Spending received a lift during the second quarter from the government's stimulus plan."

"Bernanke, who was on Capitol Hill this week urging quick passage of the administration's plan to rescue weakened Wall Street firms, said the U.S. faces ``grave threats'' to financial stability and warned the credit crisis is hurting business spending. He added that the outlook for consumer spending is ``sluggish at best.''"

Labor Market

"A deteriorating labor market is one reason consumer spending is likely to stagnate this quarter, the worst performance since 1991, according to economists surveyed by Bloomberg earlier this month."

"The U.S. has lost jobs every month this year, and the unemployment rate in August jumped to a five-year high of 6.1 percent, according to Labor Department data."

"Retail sales fell in August for a second consecutive month, the Commerce Department said previously. Holiday sales during November and December may be the weakest in six years as high food prices pare spending on non-essential items, the National Retail Federation said in a statement Sept. 23."

"The trade gap widened to a $381.3 billion annual pace and added 2.9 percentage points to growth, the biggest contribution since 1980 and down from the previous estimate of 3.1 percent. Excluding trade, the economy would have contracted at a 0.1 percent pace after growing at a 0.1 percent rate in the first three months of the year."

The boost from trade may wane this quarter as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter.

`Very Weak August'

"Dell Inc., the world's second-largest personal-computer maker, said that a U.S. slowdown in technology spending that started last quarter has spread to Western Europe and some Asian countries."

"``We saw a very weak August,'' Chief Financial Officer Brian Gladden said Sept. 16 at a Bank of America Corp. investment conference in San Francisco, reiterating comments made last month. ``It is not coming back the way we thought it would.''"

"Estimates for inventories were revised downward. Companies drew down stockpiles at a $50.6 billion annual rate from April through June, compared with a previous estimate of $49.4 billion. The decrease subtracted 1.5 percentage points from growth."

"Corporate profits were revised lower. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, were down 3.8 percent to an annual rate of $1.53 trillion. The prior estimate was a drop of 2.4 percent."

"Sept. 26 (Bloomberg) -- Corn and soybeans tumbled the most in a week after the U.S. government's $700 billion financial rescue plan stalled and the economy slowed, signaling reduced demand for grain and oilseeds."

"Global stocks and commodities fell after U.S. lawmakers failed to pass a rescue plan for the financial industry, and Washington Mutual Inc. became the biggest U.S. bank failure in history. The U.S. economy expanded more slowly than estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified."

"``The economy is headed for negative growth, and the fear of recession is growing,'' which will curtail consumption of the crops used in food, livestock feed and fuels, said Greg Grow, a director of agribusiness for Archer Financial Services in Chicago."

"Corn futures for December delivery fell 15 cents, or 2.7 percent, to $5.4375 a bushel at 10:17 a.m. on the Chicago Board of Trade. Before today, the commodity declined 30 percent from a record $7.9925 on June 27."

"Soybean futures for November delivery dropped 14.75 cents, or 1.3 percent, to $11.6825 a bushel. Before today, the price slid 28 percent from the all-time high of $16.3675 on July 3."

A close at those prices would mark the biggest percentage drops for the most-active contracts since Sept. 18.

"Corn still has gained 0.2 percent this week, and soybeans were up 1.7 percent."

"The Reuters/Jefferies CRB Index dropped as much as 1.6 percent, led by energy. The Standard & Poor's 500 Index slid as much as 1.8 percent."

"The U.S. economy's expansion rate of 2.8 percent was less than an estimate of 3.3 percent last month, Commerce Department data showed today. Personal consumption, trade and business investment contributed less to GDP than the prior estimate."

"Corn is the biggest U.S. crop, valued at a record $52.1 billion in 2007, followed by soybeans at $26.8 billion, government figures show."

"Credit-default swaps on the U.K.'s biggest lender to landlords rose 127 basis points to 1,383, according to CMA Datavision prices as of 3:30 p.m. in London."

"A basis point on a credit-default swap contract protecting 10 million euros ($14.6 million) of debt from default for five years is equivalent to 1,000 euros a year."

"Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality; a decline signals the opposite."

"Sept. 26 (Bloomberg) -- American consumers lost confidence in September as they saw the credit crisis deepen, a sign they will curtail spending."

"The Reuters/University of Michigan final index of household sentiment declined to 70.3, lower than forecast, after a reading of 73.1 in early September. A government report today showed consumer spending was less than initially estimated in the second quarter, slowing economic growth."

"Since the preliminary Michigan report was issued on Sept. 12, Lehman Brothers Holdings Inc. filed for bankruptcy, the federal government took over American International Group Inc. and stocks plummeted. The biggest financial meltdown since the Great Depression is likely to hurt consumer spending and the economy for the rest of the year."

"``The credit crisis makes the outlook for growth more uncertain,'' said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York who had forecast a sentiment reading of 70. ``The consumer is under pressure, and all these financial and credit concerns are going to weigh on the economy at the same time that there's concern about slowing growth outside the U.S.''"

"Treasuries were higher, pushing yields down. The benchmark 10-year note yielded 3.79 percent as of 12:34 p.m. in New York, down 6 basis points from yesterday. Stocks were lower after negotiations on the bank bailout plan stalled on Capitol Hill. The Standard & Poor's 500 Index was down 1.2 percent at 1194.41."

GDP Report

"The Commerce Department reported the U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, down from a preliminary estimate of 3.3 percent issued last month. Personal consumption, trade and business investment all contributed less to gross domestic product than previously estimated, the report showed."

"The biggest part of the economy, consumer spending, rose at a 1.2 percent annual rate from April through June, weaker than the 1.7 percent estimated last month. Spending received a lift during the second quarter from the government's stimulus plan."

"The confidence index was forecast to fall to 70.8, according to the median estimate of 62 economists surveyed by Bloomberg News. Estimates ranged from 63.9 to 73.3. The measure was still higher than the August reading of 63, reflecting lower gasoline prices this month. The gauge of sentiment averaged 85.6 in 2007."

Consumer Expectations

"The index of consumer expectations for six months from now, which more closely projects the direction of spending, declined to 67.2 from a preliminary reading of 70.9 in early September. The measure is up from 57.9 in August."

"A gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, dropped to 75 from a preliminary reading of 76.5. The reading was 71 in August."

"Consumers said they expect an inflation rate of 4.3 percent over the next 12 months, compared with 4.8 percent in the August survey."

"The final Reuters/University of Michigan consumer confidence report reflects about 500 responses, compared with 300 households for the preliminary survey."

"Today's gross domestic product report showed that the Fed's preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, higher than forecast and faster than the 2.1 percent previously estimated. Prices overall came in less than anticipated."

Labor Market

"A deteriorating labor market is one reason consumer spending is likely to stagnate this quarter, the worst performance since 1991, according to economists surveyed by Bloomberg earlier this month."

"The U.S. has lost jobs every month this year, and the unemployment rate in August jumped to a five-year high of 6.1 percent, according to Labor Department data."

"Retail sales fell in August for a second consecutive month, the Commerce Department said previously. Holiday sales during November and December may be the weakest in six years as high food prices pare spending on non-essential items, the National Retail Federation said in a statement Sept. 23."

"The financial crisis escalated in the second half of September, bringing down Lehman Brothers and AIG and roiling nerstock markets. The S&P 500 index on Sept. 23 capped its biggest two-day slump in six years."

"Earlier this month, the government also seized control of mortgage financiers Fannie Mae and Freddie Mac in an attempt to keep the housing slump from worsening."

Gasoline Prices

"Regular unleaded gasoline prices have eased to an average of $3.72 a gallon at the pump so far this month, compared with $3.76 in August and more than $4 in July, according to AAA."

"At the same time, eight consecutive months of job losses in the economy and declines in home prices are making shoppers wary."

"Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, reported a 19 percent drop in second-quarter profit, and predicted a decline in earnings this quarter."

"Sales ``continued to be negatively affected by the economic slowdown in general and by issues specific to the housing industry in particular,'' Chief Executive Officer Steven Temares said on a conference call on Sept. 24."

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.netTimothy R. Homan in Washington at thoman1@bloomberg.net

"Last Updated: September 26, 2008 12:41 EDT"

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German Inflation Slows Less Than Expected on Energy (Update1)

By Christian Vits

"Sept. 26 (Bloomberg) -- Inflation in Germany, Europe's largest economy, slowed less than economists forecast in September as a midyear spike in oil worked through to consumer prices."

"Prices rose 3 percent from a year earlier using a harmonized European Union method, the Federal Statistics Office in Wiesbaden said today. Economists expected the inflation rate to fall to 2.9 percent from 3.3 percent, according to the median of 15 forecasts in a Bloomberg News survey. From August, prices fell 0.1 percent."

"While the cost of oil has receded from a record $147.27 a barrel in July, its are still up 30 percent over the past year, reducing consumers' and companies' spending power. The European Central Bank kept its benchmark rate at a seven-year high of 4.25 percent this month and ECB President Jean-Claude Trichet said on Sept. 11 that inflation is the main worry of European citizens."

"``German inflation is currently more persistent than we had thought as energy prices work through into consumer prices,'' said Andreas Rees, chief German economist at UniCredit Markets & Investment Banking in Munich. ``The ECB will remain more focused on inflation than on slowing economic growth.''"

"Under a national measure, the inflation rate declined to 2.9 percent from 3.1 percent in August and fell 0.1 percent from the previous month."

ECB Concerns

"The ECB is concerned companies will raise prices to pass on higher raw-material costs and unions will push through bigger raises to compensate workers for the increased cost of living. With inflation breaching the ECB's 2 percent limit for the past year, the central bank's room for maneuver is limited even as growth weakens. ECB council member Axel Weber said this week that weaker growth won't ``magic away'' inflation."

"Import-price inflation in Germany, which accounts for about a third of the euro-region economy, held at the fastest pace in almost eight years in August led by higher energy costs, the Federal Statistics Office in Wiesbaden said today. Excluding energy, import prices rose 4.1 percent in the year."

"The ECB raised its inflation projections this month to around 3.5 percent for 2008 and 2.6 percent for 2009. At the same time, ECB staff lowered their growth forecasts for this year and next to about 1.4 percent and 1.2 percent, respectively."

ECB Vice President Lucas Papademos said in an interview with Italy's Il Sole 24 Ore published today that there are ``clear indications'' of faster wage increases and that the bank ``cannot exclude renewed increases'' in oil and commodity prices. ``The outlook for inflation over the medium term will fundamentally depend on future unit-labor cost growth.''

Wage Demands

"Germany's IG Metall labor union, representing 3.2 million workers, is seeking the biggest pay increase in 16 years for staff at companies such as ThyssenKrupp AG and Siemens AG. The union, Germany's biggest, wants wages to rise 8 percent next year, Chairman Berthold Huber said this week."

"Still, with the economy cooling, companies may find it more difficult to pass on higher costs. The economies of the euro region and Germany both shrank between March and June and data since then has raised the possibility of a recession."

German business confidence declined more than expected to the lowest level in more than three years in September as the worsening financial crisis in the U.S. damped the outlook for global economic growth. The world's biggest financial companies have posted more than $520 billion in writedowns and credit losses after the subprime mortgage market collapsed.

"``The time has come to lower interest rates,'' Gernot Nerb, an economist at Ifo institute which conducts the business confidence survey, said last week. ``That doesn't have to happen next week, but the signal should soon come that rates will fall in the next few months.''"

Sept. 26 (Bloomberg) -- Crude oil may fall next week on concern that U.S. fuel consumption will weaken because of lower economic growth.

"Fourteen of 29 analysts surveyed by Bloomberg News, or 48 percent, said prices will decrease through Oct. 3. Eight of the respondents, or 28 percent, said oil will rise and seven said prices will be little changed. Last week 47 percent expected futures to increase."

"U.S. fuel demand averaged 19.5 million barrels a day during the past four weeks, the lowest since October 2003, the Energy Department said in a Sept. 24 report. Sales of new homes in the U.S. fell in August to a 17-year low and orders for durable goods dropped more than forecast, government reports showed yesterday."

"``Concern about economic growth is weighing on the market,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. ``Unfortunately, the end of the economic crisis isn't in sight.''"

The survey was completed before Senate Banking Committee Chairman Christopher Dodd said Republicans and Democrats have agreed on a ``set of principles'' for a financial-rescue package.

"Crude oil for November delivery rose $5.27, or 5.1 percent, to $108.02 a barrel so far this week on the New York Mercantile Exchange. Futures have fallen 27 percent since touching $147.27 a barrel on July 11, the highest since trading began in 1983."

The oil survey has correctly predicted the direction of futures 49 percent of the time since its start in April 2004.

" Bloomberg's survey of oil analysts and traders, conducted"
"each Thursday, asks for an assessment of whether crude oil"
"futures are likely to rise, fall or remain neutral in the coming"
week. The results were:

Sept. 26 (Bloomberg) -- French consumer confidence unexpectedly rose for the first time in more than a year in September after falling fuel prices left people with more to spend on food and clothing.

"A gauge of consumer sentiment rose to minus 44 from a revised record-low minus 47 in July, the last month reported, the Paris- based national statistics office, Insee, said in a statement today. Economists expected a reading of minus 47, according to the median of 20 forecasts in a Bloomberg News survey."

"The price of oil has fallen by almost a third from its record in July. Still, crude remains at more than $100 a barrel and is 33 percent higher than a year ago. At the same time, a deepening crisis in global financial markets may dim consumers' willingness to spend in coming months."

"``Whether it's consumption, investment or exports, all the engines of French growth are stopped, or even in reverse,'' said Marc Touati, chief economist at Global Equities in Paris, before the report."

"Earlier this month, Finance Minister Christine Lagarde pared her prediction for 2008 economic growth to around 1 percent from a previous forecast of at least 1.7 percent. Those forecasts may prove optimistic as the worst U.S. housing slump since the Great Depression has pushed up the cost of credit globally and roiled financial markets, threatening to further pare global growth."

Growth Declines

"The French economy shrank 0.3 percent in the second quarter, the first contractions in more than five years, a separate report confirmed today. Household spending fell 0.1 percent, while exports declined 1.7 percent, from an increase of 2.6 percent in the first three months. The European Commission predicted Sept. 10 that the economy will stall in the third quarter, barely skirting a recession."

"``It's possible France's GDP will shrink in the third quarter; even zero growth would be good,'' Frederik Ducrozet, an economist at Credit Agricole SA in Paris, said on Bloomberg Television."

"The gain in French confidence mirrored advances in Germany and Italy as the lower oil prices fueled optimism that record inflation rates would ease. Confidence among consumers in Germany, Europe's biggest economy, unexpectedly rose for the first time in five months, a report showed yesterday. Italian confidence advanced from a 15-year low in August."

"Manufacturers were less optimistic. Confidence among French producers dropped to a five-year low in September, Insee said on Sept. 24, suggesting that the turmoil in markets fueled by the collapse of Lehman Brothers Holdings Inc. has overshadowed declines in oil and the dollar. Crude has fallen 27 percent decline since a July 11 record of $147.27 and the euro also declined from a peak against the dollar the same month."

"French President Nicolas Sarkozy said in a speech on the economy yesterday that the turmoil in financial markets will be lasting and the fallout will hurt growth, employment and spending."

"Sept. 26 (Bloomberg) --Mexico's peso declined as U.S. negotiations for a $700 billion plan to bail out the nation's financial system stalled, stoking concern that global growth will slow."

"Investors remain ``very nervous about the lack of a conclusion to the meeting to authorize a package for the banks,'' said Omar Martin del Campo, a currency trader at Banco Ve Por Mas SA in Mexico City. The U.S. is Mexico's largest trading partner."

"The peso fell 0.7 percent to 10.79 per dollar at 12:20 p.m. New York time from 10.7125 yesterday. The currency is down 4.6 percent this month, and hit an eight-month low on Sept. 18."

"A delay of a U.S. resolution into next week would likely lead to a continuation of today's low volumes, which have fueled volatility, Martin del Campo said."

"Across emerging markets, ``the sole focus of attention remains the U.S. banking package,'' Toronto-based RBS Emerging Markets Research Group said in a report to clients. ``Against predictions of financial Armageddon in the event of failure, the markets are interested in little else.''"

"Chile's peso fell 0.7 percent to 539.85 per dollar. The yield for a basket of five-year Chilean peso bonds in inflation- linked currency units, known as unidades de fomento, rose 9 basis points, or 0.09 percentage point, to 3.25 percent, according to Bloomberg composite prices."

"Sept. 26 (Bloomberg) -- Platinum and palladium tumbled, capping the fourth-straight weekly slide, as the sagging U.S. economy signaled declining demand for the metals used in car and truck parts."

"U.S. gross domestic product expanded more slowly than estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified. Platinum consumption by automakers accounts for more than 60 percent of global demand."

"``All economic reports of late are pointing to a significant recession, and the platinum-group metals are suffering from that,'' Miguel Perez-Santalla, a sales vice president at Heraeus Precious Metals Management in New York, said in a report."

"Platinum futures for January delivery fell $68.10, or 5.7 percent, to $1,123.10 an ounce on the New York Mercantile Exchange. The metal fell 2.1 percent this week and has plunged 51 percent from a record $2,308.80 on March 4."

Palladium futures for December delivery dropped $16.95 to $225.50 an ounce. The drop of 7 percent was the biggest since Sept. 9. The price fell 4.8 percent this week and is down 40 percent this year.

The metals are used in jewelry and pollution-control devices in cars.

"The U.S. economy's expansion rate of 2.8 percent was less than an estimate of 3.3 percent last month, Commerce Department data showed today. Personal consumption, trade and business investment contributed less to GDP than the prior estimate."

"Sept. 26 (Bloomberg) -- Traders almost doubled bets that the Reserve Bank of Australia will cut the benchmark interest rate by 50 basis points for the first time in seven years, to encourage banks to boost lending amid a global credit freeze."

"The odds of a 50-point cut next month were at 53 percent at 2:40 p.m. in Sydney, up from 32 percent on Sept. 22 and zero on Sept. 12, according to a Credit Suisse Group index based on trading in interest-rate swaps. Three-month interbank loan interest rates today exceeded the cost of six-month bills by the most since April 2001, showing investors expect rates to fall."

"``The pressure in the short-term money market really does suggest that even if the Reserve Bank cuts by 25 basis points, banks wouldn't pass that on,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. ``Policy makers will have to cut by 50 basis points'' to get banks to trim mortgage rates."

"Banks are hoarding cash, pushing up funding costs to the most since Bear Stearns Cos. collapsed in March, as talks falter on the U.S. government's $700 billion plan to rescue the financial system. Mike Smith, the head of Australia & New Zealand Banking Group Ltd., signaled yesterday the nation's fourth-largest bank may not pass to mortgage customers all of any potential central bank rate cuts when policy makers meet on Oct. 7."

"Australian lenders increased deposits with the central bank five-fold in two weeks to a record A$7.4 billion ($6.2 billion) as they seek risk-free investments. The cash is in exchange settlement accounts at the Reserve Bank, which earn interest at 25 basis points below the central bank's 7 percent benchmark rate. A basis point is 0.01 percentage point."

Central bank Governor Glenn Stevens reduced the overnight cash rate target by a quarter-percentage point this month from a 12-year high.

Funding Costs

"Three-month bank bill yields were 19 basis points higher than six-month yields today, the most since April 2, 2001, two days before the Reserve Bank last cut benchmark rates by half a point. The central bank reduced borrowing costs in 2001 as global growth slumped following the collapse of internet stocks. Interest rates are usually higher the longer the term of the lending."

"``Market participants want more aggressive rate cuts by the RBA,'' said Akira Takei, general manager for international bonds at Mizuho Asset Management Co. in Tokyo. ``Global banks are being more and more stingy with credit and small companies are having trouble raising financing.''"

"Australian policy makers said they cut borrowing costs on Sept. 2 because the risk of leaving the benchmark rate too high for too long outweighed the danger of stoking inflation, according to minutes of the decision."

Consumer Spending

"Consumers reduced quarterly spending in the three months through June for the first time since 1993, slowing gross domestic product growth to the weakest pace in more than three years."

"``One school of thought argues that only a 50 basis point cut will get market interest rates down sufficiently,'' said Stephen Walters, chief economist JPMorgan Chase & Co. in Sydney. ``Our view, though, is that a combination of political and political pressure should be sufficient to trigger material falls in market interest rates'' following a quarter point reduction by the central bank, he added."

Speculation of a larger cut by the Reserve Bank increased as U.S. Congress debates U.S. Treasury Secretary Henry Paulson's plan to inject $700 billion into paralyzed credit markets.

Hoarding Cash

"``The bottom line is that banks continue to hoard cash and liquidity remains tight,'' said Joshua Williamson, a senior strategist at TD Securities Ltd. in Sydney. ``An improvement in the short-term is now very dependent on the speedy passing and implementation of the U.S. government's rescue package.''"

"The difference between the rate that banks charge each other for three-month loans and the overnight indexed swap rate stood at 93 basis points in Sydney, after widening to as much as 99 points yesterday, Bloomberg data show. The gap, a benchmark for bank funding, averaged 17 basis points last year."

"``It's in nobody's interests to keep rates high,'' ANZ Chief Executive Officer Smith said in Sydney yesterday when asked whether his bank will pass on in full any Reserve Bank rate cuts next month. ``I want to reduce rates as well. However, I have to fund a book. We will have to wait and see,'' he said."

"Australian lenders cut the rate on variable mortgages, used by about 90 percent of the nation's households, by 25 basis points following the Reserve Bank's decision to lower the overnight cash rate by that amount on Sept. 2."

"``There will be an economic cost from the credit crisis,'' said Macquarie's Redican. ``Global growth will be slower and that will flow through to Australia. That, as well as the increase in funding costs, means there is much more scope for the Reserve Bank to be more aggressive'' in cutting rates."

Sept. 26 (Bloomberg) -- Japan's consumer-price inflation exceeded 2 percent for a second month as companies passed on costs of food and other daily necessities.

"Core prices, which exclude fresh food, climbed 2.4 percent in August from a year earlier, the same pace as July, the statistics bureau said today in Tokyo. The median estimate of 33 economists surveyed by Bloomberg News was for a 2.4 percent increase."

"The fastest inflation in a decade won't spur an interest- rate increase by the Bank of Japan because prices gains are likely to moderate as oil costs drop. Policy makers will probably keep the key rate at 0.5 percent, the lowest in the industrialized world, as it monitors the effect of the global financial crisis on Japan's shrinking economy."

"``Inflation will peak soon,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo. ``That will allow the Bank of Japan to remain on hold and keep an eye on the economy for a while.''"

The yen traded at 105.96 per dollar at 11:21 a.m. in Tokyo from 106.40 before the report was published. Yields on 10-year government debt fell 1 basis point to 1.465 percent.

"The core inflation rate has surpassed wage growth for four months, stripping consumers of their spending power and pushing their sentiment to a 26-year low. The economy contracted last quarter as exports and personal spending dropped."

Inflation Alarm

"``We are not ringing the secondary-inflation alarm, as wages are weak and penetration of price hikes is likely to be mild,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo."

"Crude oil has fallen by more than a fifth since rising to a record in July. Soybeans, corn and wheat have slumped after climbing to records this year."

Finance Minister Shoichi Nakagawa said today that higher prices are hurting consumers and companies and that the government is taking measures to ease the burden. The government said last month it would cut taxes for some low-income earners.

Some economists say consumer inflation will hover around 2 percent even as commodity costs tumble because companies have yet to make up for accumulated losses incurred by fuel and material cost increases and will try to pass on costs to clients.

"``Though the economy will likely be stuck in a recession for a while, prices will stay at high levels,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``The central bank will neither raise nor cut rates for the time being.''"

Potato Chips

"Calbee Foods Co., a Tokyo-based snack food maker, said this month it will raise potato chip prices by about 8 percent in November to offset costlier edible oil. The company last year tried to absorb costs by reducing the amount of chips per package."

"Bank of Japan policy makers have said they consider core prices to be stable if they stay between zero and 2 percent over the mid- and long-term period. Prices by that measure will probably average 1.6 percent in 2008 and 1.4 percent in 2009, according to Tetsufumi Yamakawa, a former Bank of Japan official and now chief Japan economist at Goldman Sachs Group Inc."

Shelved Policy

The central bank has kept the key overnight lending rate at 0.5 percent since doubling it in February 2007. It shelved a policy of gradual rate increases in April.

"Of 29 economists who gave predictions through June in a Bloomberg survey, 24 said the central bank will keep rates unchanged by then. Four estimated higher rates and one forecast a cut."

"Excluding food and energy, prices were unchanged in August from a year earlier after increasing 0.2 percent in July. Core prices in Tokyo advanced 1.7 percent in September from a year earlier, faster than the 1.5 percent increase of August, today's report showed."

"Sept. 26 (Bloomberg) -- Reports on U.S. consumer confidence, non-farm payrolls and ISM Manufacturing as well as the interest- rate decision from the European Central Bank may move stock markets next week."

The Dow Jones Stoxx 600 Index dropped 4.3 percent this week to 265.22 as of 3:04 p.m. in London after negotiations on a $700 billion bailout plan for banks stalled and Washington Mutual Inc. was seized in the biggest U.S. bank failure in history.

"``The focus will remain on the `troubled asset relief program' and perceptions of its ability to adequately deal with the stresses on the financial system,'' Deutsche Bank analysts Mairead Smith and Greg Poole wrote in a note today. ``In the U.S., the employment report for September will give an important insight on the evolution of labor markets.''"

"The Conference Board's confidence index for September is due for release on Sept. 30. Confidence among American consumers probably fell to 55 from 56.9 in August, according to economists in a Bloomberg survey."

"The ISM Manufacturing Index for this month will be published on Oct. 1 and non-farm payrolls are set for release two days later. The U.S. probably lost 100,000 jobs in September, according to economists in a Bloomberg survey. That compares with an 84,000 drop in August."

"ECB policy makers are scheduled to announce their interest- rate decision on Oct. 2. The central bank will keep its benchmark lending rate at a seven-year high of 4.25 percent to fight inflation even as economic growth in the region slows, according to a Bloomberg survey of economists."

There are no major earnings releases scheduled for next week in Europe.